Discussion Question:
Case:
Verification of Accounts Receivable Balances
Learning Objectives: This activity aims to enable the students to understand methods used for obtaining confirmation from the credit customers regarding their account balances for verification.
Learning Outcomes: After going through this activity, the students would be able to exercise their understanding to obtain confirmation form debtors and verify their account balances using certain methods.
Case:
Mr. Ali is on external audit of Model Manufacturing Limited (MML) and planning to verify the company’s various accounts’ balances with special focus on verification of the receivables. He has observed that most of the company’s sales were on credit basis thus increasing the number of debtors over five thousand. For these balances, he is interested to obtain balance confirmation using negative method. But, after going through a complete review of MML’s internal controls, one of his team members argues to use positive method instead.
a. Do you think that the negative method used by Ali is appropriate? Explain your answer with appropriate rationale. (2 Marks)
b. Comment on the argument of Ali team member. (1.5 Marks)
c. Give your own opinion in selection of both the methods. (1.5 Marks)
Important Instructions:
1. Your discussion must be based on logical facts.
2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
3. Obnoxious or ignoble answer should be strictly avoided.
4. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.
Ø For Detailed Instructions please see the GDB Announcement
Solution:
The following are the terms required for verification of Debtors Balances
Verification
of Debtors Balances
Following
points should be considered during verification of Debtors Balance:
i)
Obtain confirmation from debtors.
ii)
Verify debts with reference to cash received since year-end.
iii)
Check accuracy and completeness of debtors' listing.
iv)
Check book-keeping in small sample of ledger accounts.
v)
Check postings and enquire into unusual entries in the control account.
vi)
Verify nature, amount and classification of credit balance.
vii)
Check transaction of foreign currency balances.
viii)
Review post year-end credit notes.
ix)
Enquire into debtor balances cleared by journal entries after the year-end
x)
Consider un-provided claims, enquire and review correspondence.
xi)
Check credit note cut-off, if material.
xii)
Consider adequacy and check bases and calculations of provisions for rebates
xiii)
Verify existence and title to bills receivable, trace proceeds.
xiv)
Consider whether results of work on cutoff affect debtors.
xv)
Review audit work on income.
These are the Terms for Confirmation from debtors and methods which are used for confirmation and verification.
Confirmation
from Debtors:
Through
verification of debtor’s balances by direct communication the auditor obtains
information regarding:
(i)
Adequacy of the system of internal control over sales, debtors, and
collections;
(ii)
Accuracy of accounting records in general and of cut-off procedures for balance
sheet purposes
in
particular; and
(iii)
Irregularities such as teeming and lading, overdue balances & incorrect
balances.
The
above information helps an auditor to form an opinion regarding:
(a)
Reliability of debtors balances; and
(b)
Quantum and nature of disputes existing between the company and its customer.
Methods
of obtaining Debtors Confirmation
(i)
Positive Method. Under
positive method the company requests the debtor to confirm his
indebtedness
to the company direct to the auditor and in case of disagreement he is also
required to
state
the balance as per his records and provide the auditor with full particulars of
the difference.
(ii)
Negative Method. Under negative method the
company requests the debtor to communicate with
the
auditor only if he disagrees with the balance. If no communication is received
within specified
time
the auditor may assume that the balance is agreed.
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