NATIONAL ECONOMICS UNIVERSITY EXCELLENT EDUCATIONAL PROGRAM o0o BACHELOR THESIS Major Auditing AUDIT OF TRADE RECEIVABLES ITEM IN FINANCIAL AUDITS CONDUCTED BY UHY AUDITING AND CONSULTING COMPANY LIMI[.]
CHARACTERISTICS OF AUDIT OF TRADE
Characteristics of trade receivables of clients affecting financial audits
Based on the economic subject and content of account receivables , the receivables must include four types:
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According to Article 17 of Circular 200/2014/TT-BTC on accounting principles of receivables:
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Receivables are a crucial component of the balance sheet, closely linked to various financial items such as inventory, raw materials, and income statement accounts like revenue and cost of goods sold When businesses offer credit sales or receive prepayments, accounts receivable increase, affecting cash flow and overall financial health An increase in receivables often indicates higher sales volume, while reductions may result from collections or changes in credit policies The level of receivables is also impacted by provisions for doubtful debts, influencing financial costs and tax liabilities Generally, as revenue and cost of goods sold rise, receivables tend to increase unless the company's selling policies change, highlighting their integral role in financial analysis and reporting.
Trade receivables should be meticulously tracked and recorded for each debtor, ensuring detailed documentation of every receivable item It is essential to monitor both short-term and long-term receivables separately, with comprehensive records maintained for each payment to facilitate accurate collection and effective receivables management.
The subject of receivables are the client who has economic relations with the company on the purchase of products, goods, services, including fixed assets and real estate investment
Do not reflect in this account the operations of selling products, goods, providing services that collect money immediately (Cash, check or bank draft)
In accounting, it is essential for accountants to classify debts into those that can be paid on time, bad debts, or irrecoverable debts This classification provides the basis for determining appropriate provisions for bad debts and implementing measures to handle irrecoverable accounts effectively Proper debt classification ensures accurate financial reporting and effective credit management.
In transactions involving the sale of products, goods, or services between companies and clients, the buyer has the right to request a price reduction or return of goods if the products or services have been delivered as per the agreement Under the terms of the economic contract, buyers can seek to renegotiate prices or return items once the transaction is completed Ensuring clarity on these rights helps facilitate smooth business exchanges and protect consumer interests.
The system of vouchers and accounting books of trade receivables
To accurately record true and fair accounts receivables, it is essential for an entity to maintain various accounting books, including subsidiary ledgers for monitoring individual customer balances, a general ledger of trade receivables, and summaries of trade receivables Analyzing debt aging helps assess collection risks, while subsidiary ledgers for bad debt provisions and doubtful debts facilitate effective risk management Additionally, documenting Board of Directors' decisions regarding the resolution of bad debts ensures proper accountability and accurate financial reporting.
One essential control measure for many companies today is the necessity for accountants to perform client debt reconciliations, ensuring any discrepancies are identified and addressed at the end of each accounting period.
Documents relating to the accounting of trade receivables.
Economic contract or purchase request;
- Payment vouchers: Bank's receipt, credit note, transferred money;
- Accounting vouchers (when setting up reserves);
- Records related to the elimination of bad debts;
Diagram 1.1: Accounting diagrams of account receivables
1.1.3 Common misstatements related to trade receivables
Trade receivables constitute the largest portion of receivables and are directly linked to a company's revenue and sales cycle Due to their significance, they are the most common target for fraud and errors in financial reporting Common mistakes related to trade receivables include inaccuracies in recording sales, misappropriation of receivables, and improper allowance for doubtful accounts, all of which can significantly impact a company's financial health Proper management and internal controls are essential to ensure the accuracy and integrity of trade receivables.
Currently, there are no specific financial regulations governing debt collection practices, leading to inconsistent standards across the industry The approval process for extending credit remains incomplete and lacks strict control, raising concerns about financial risk management Additionally, regulations do not specify limits on the maximum debt amount or payment terms for customers, increasing the potential for credit-related vulnerabilities Implementing comprehensive regulations in these areas could improve the overall stability and transparency of credit practices in the financial sector.
Some companies lack a dedicated monitoring ledger for each customer or specific objects, often monitoring multiple accounts for the same object, which can lead to offsetting different items As a result, at the end of the financial period, foreign currency accounts receivables are not properly evaluated, potentially impacting financial accuracy and reporting quality Implementing individual account tracking and thorough receivable assessments is essential for accurate financial management and compliance.
Incomplete debt reconciliation or lack of comparison at the time of preparing financial statements can lead to discrepancies between debt comparison vouchers and the accounting ledger These differences should be promptly analyzed, with explanations provided for the causes, to ensure accurate financial reporting and maintain transparency.
- Accounting of wrong content, amount, nature of receivables transaction, accounting of non-commercial receivables into account 131, or accounting of trade receivables into account 1388.
Reducing trade receivables due to returned goods and adjusting for sales made at discounted prices without proper supporting invoices or vouchers can lead to discrepancies These practices may result in an inflated accounts receivable balance that does not accurately reflect actual revenue, causing potential issues with financial accuracy and compliance Proper documentation and accurate recording of returns, discounts, and receivable adjustments are essential to ensure transparent and reliable financial statements.
- Not yet conducted the debt age analysis of trade receivables.
Failure to establish provisions for doubtful receivables, or setting provisions that exceed or fall short of the permitted ratio, results in incomplete and non-compliant documentation Additionally, not forming a public council to oversee doubtful debts further compromises the validity of the provision process Consequently, these issues lead to inaccurate reflection of the net value of receivables on the balance sheet, affecting financial statement reliability and compliance.
1.1.4 Internal controls over trade receivables
Effective management of receivables requires a robust internal control system to prevent capital loss and ensure timely payments Internal controls for customer receivables should be integrated throughout the sales and collection processes Specifically, at each stage of selling and collecting, internal controls are implemented to monitor, verify, and ensure accuracy, compliance, and efficiency, thereby safeguarding enterprise assets and improving cash flow management.
Table 1.1: Internal control over trade receivables
The steps of process of selling and collecting
Internal control procedures trade receivables
- Consider the buyer's proposal, balance the ability to meet the goods ordered.
- Considering the financial ability of customers to pay for goods or not.
- Credit control and sale approval
- Consider the solvency, the credit for the buyer to approve the credit sale reasonable.
- Determining a reasonable payment method based on the interests of both parties.
- To sign a commercial contract which records the rights and obligations of the parties, which is the legal basis for the dispute.
- Goods, service delivery - When delivering goods, conducting the procedures for delivery and receipt, there must be vouchers such as receipt note, delivery bills, transport documents
- Transfer invoices to buyers - The seller must make a bill for the records quantity, sale price and must record the book of each transaction.
- Processing and recording accounts receivables
- When collecting goods, transactions must be recorded in full and in time.
- Attention should be paid to the ability to hide and omit collections, especially for direct cash receipts.
- Handling reduce the carrying amount of sales arising
- Revenue deductions must be properly and promptly handled and recorded.
Audit objectives of auditing trade receivables in financial audits
Trade receivables are a crucial component in financial statement audits, requiring auditors to gather sufficient and appropriate evidence to verify key assertions such as existence, completeness, rights and obligations, accuracy, valuation, presentation, and cut-off At UHY Ltd, the audit of trade receivables follows these general audit objectives to ensure the accuracy and reliability of financial data related to this vital item.
Table 1.2: Objectives of auditing accounts receivables
Specific audit objective in account receivables items
Recorded account receivables must be available at the time of making the report.
All receivables are fully reflected in the financial report, ensuring completeness of the company's accounts Account receivables are solely owned by the company, establishing clear rights and obligations Furthermore, receivables must be accurately recorded at the correct amounts on the financial statements, maintaining consistency between the subsidiary ledger and the general ledger to ensure accurate financial reporting.
Provisions for bad debts are appropriately evaluated in accordance with accounting standard and exchange rate receivables derived from foreign currencies must be recognized at the end of the period.
Receivables are classified and presented properly, disclosed fully and clearly Receivables are classified according to their payment terms: short- term receivables and long-term receivables.
Receivables are recognized at the arising time.
Cash receipts are recorded promptly and on time.
Audit of trade receivables in financial audits process conducted by UHY
UHY Ltd specializes in auditing financial statements to verify their accuracy and provide an independent opinion on their true and fair view The company follows a structured three-step audit process to gather sufficient and appropriate evidence efficiently and cost-effectively This comprehensive approach ensures the delivery of reliable audit conclusions within the designated timeframe.
The main steps in the FSs auditing process performed by UHY Ltd are summarized in Diagram 1.2.
Audit of trade receivables are a part of FSs auditing so the auditing of trade receivables should also follow this process.
Diagram 1.2: Audit process in financial statement audit conducted by
Audit planning and documentation Obtain client information
Perform analytical procedure Understand internal control system and preliminary evaluate of control risk
Materiality and Risk assessment Design audit plan
Perform Test of Control Perform Substantive test Perform Test of Detail
Summary audit result Discussion meeting with client Set up a draft in audit report and management letter (if any)
Issue the official audit report and management letter (if any)
1.3.1 Planning an audit of trade receivables item in auditing financial statements conducted by UHY Ltd
Planning an audit is the first step but it plays a role since it creates the
Completing the audit necessary conditions for an audit In the stage of planning auditing receivables, the auditor of UHY Ltd performs the following work steps.
UHY Ltd evaluates a client's suitability for audit acceptance by considering their specific requirements, the company's capacity to provide quality audit services, and the potential impact on the auditor’s risk profile The firm assesses whether conducting audits for certain clients could pose increased risks to the auditor or potentially harm the company's reputation This careful review ensures that UHY Ltd maintains high standards of integrity and reliability while meeting client needs and safeguarding its professional standing.
Auditors of traditional clients must regularly update and assess whether any high-risk changes occur Based on this evaluation, UHY Ltd determines whether to continue providing auditing services to the client.
When onboarding a new client, the auditor conducts thorough research using media outlets, magazines, newspapers, and online sources to gather essential information They assess the integrity and reputation of the client's management team and contact previous auditors to understand the reasons behind changing audit firms Based on this comprehensive evaluation, UHY Ltd decides whether to accept the audit engagement, ensuring due diligence and risk assessment are thoroughly completed.
Identify the Clients Reasons for an Audit
Identifying the reason for a client's audit involves understanding the users of the financial statements and their intended use These two factors are crucial as they directly influence the amount of audit evidence required and the level of accuracy needed for the auditor's opinion Proper assessment of user needs and the purpose of the audit ensures that the audit process is appropriately tailored to achieve a reliable and relevant opinion in the audit report.
When auditing trade receivables, the focus is on assessing the operation of the accounting system and evaluating the effectiveness of internal controls Auditors pay close attention to sales approvals, payment discounts, sales discounts, returned goods, sales returns, allowances, and related expenses to ensure accuracy and compliance They also examine whether accounting policies applied to receivables are appropriate and consistent with the company's internal control procedures, providing insights into the overall reliability of the financial reporting process.
Auditing client financial information is essential for ensuring transparency, especially when clients seek loans, attract investments, or list securities During trade receivables audits, auditors focus on verifying the accuracy and recoverability of accounts receivable, as well as confirming the client company's ownership rights over these receivables This process helps build trust and provides reliable financial data necessary for strategic decision-making and stakeholder confidence.
Prepare member in an audit
At UHY Ltd, the audit director carefully selects the audit team based on the client’s size, audit volume, and complexity, ensuring an appropriately structured team The firm prioritizes auditors with relevant industry knowledge and experience to ensure thorough and effective auditing UHY Ltd strictly adheres to professional ethics, evaluating auditors’ independence before assigning them to specific clients A comprehensive questionnaire is used to assess auditor independence, maintaining compliance with ethical standards and ensuring audit integrity.
Table 1.3 Quesionnaire of audit’s independence at UHY Ltd
Threat category Yes No N/A Note
1 Audit team members may fall into the category of self interest threat: a) Financial interest X b) Loans, guarantees or gifts received from client
X c) High percetage of fee X d) Possibility of contract loss X e) Ability to become a employee of client in the future
X f) An additional service charge arising not related to audit contract
2 Audit team members may fall into the category of self-review threat: a) Members of the audit team have been / are currently a member of client board
X b) Preparing accounting record and financial statement for client
3 Audit team members may fall into the category of advocacy threat: a) Member of the audit team is transaction agent who trade or promote the sale of stocks and securities of client.
X b) Member of the audit team is as a represent advocacy on behalf of client when client disputes with third parties.
4 Audit team members may fall into the category of familiarity threat: a) Members of the audit team have a close relationship with the employees at client company who are a significant and direct influence on the material matter of the contract.
X b) Have more than 3 years working as an audit senior for the same client.
X c) Receive special offers from Customer X
UHY Ltd engages in discussions with client management to agree on the terms of the audit contract, leading to the signing of a formal agreement This signed audit contract formally establishes the partnership between UHY Ltd and the client company for the provision of comprehensive audit and related services.
UHY Ltd ensures a smooth audit process by providing clients with a comprehensive list of required documents in advance This proactive communication helps clients understand what is needed and prepare accordingly, saving time and facilitating efficient audit procedures.
Understand about industry of client
Auditors must thoroughly understand clients' business activities to assess trade receivables accurately, including examining sales and credit policies, and identifying challenges in debt collection They also evaluate the client’s financial health by analyzing financial statements to review the company's financial position, business performance, and solvency levels over current and previous years.
Economic transactions between related parties, such as purchases and sales between parent companies and subsidiaries or collections and payments between branches, often involve large or unusual transactions that may contain errors related to receivables Therefore, identifying stakeholders is a crucial part of the audit process, particularly for UHY Ltd, as it helps auditors gather essential information about clients and ensure the accuracy of financial reporting.
The two types of analysis used by auditors of UHY Ltd are horizontal and vertical analysis.
Horizontal analysis in auditing trade receivables involves comparing the receivable balances at the beginning and end of the accounting period to identify trends and changes over time Additionally, it includes evaluating the provision for bad debts by comparing current period figures with those of the previous period to assess the adequacy of allowances and bad debt management.
Planning an audit
UHY Ltd's auditor reviewed ABC Company's previous audit files and confirmed that there were no changes in its organizational structure or accounting system in 2019 Based on this research, the auditor assessed that the audit of ABC's financial statements for the year ending December 31, 2019, is suitable with UHY Ltd's capabilities This assessment ensures that audit risks are effectively controlled, leading UHY Ltd to decide to continue providing auditing services for ABC Company.
The primary goal of ABC's audit is to verify the accuracy of its financial statements, serving the interests of shareholders and supporting the consolidated financial statements of the parent company Additionally, ABC aims to attract more investment capital in 2020, prompting a focus on trade receivables, effective targets, pricing, and rights and obligations during the audit process As a large company with complex transactions, ABC has appointed an experienced and qualified audit team led by the audit director, including auditors who previously participated in last year's audit, with only two new assistants joining the team.
UHY Ltd held a discussion with the Board of Directors of ABC JSC, the two sides came to a consensus and the audit contract was signed.
Because ABC is a traditional client, the collection of information about this customer is conducted by reviewing the previous year's audit files and updating new information
Production and business operation of ABC JSC under Business Registration Certificate include:
- Construction of domestic and foreign transport works including bridges, roads, railway stations, airports, ports and tunnels
- Construction of industrial works: warehouses, factories, yards, erection of antenna transceiver columns, infrastructure construction, leveling
- Construction of civil works: houses, offices
- Construction of irrigation works: pumping stations, sluices, dams, dykes, embankments, canals
- Investment in construction of infrastructure works, residential clusters, urban areas, industrial parks, transportation and transportation.
- Design consultancy, testing materials, consulting investment, consulting supervision of works not executed by the company.
- Producing, exploiting and trading in construction materials
- Producing and erecting steel structure, normal reinforced concrete structure and prestressed concrete, plastic concrete
- Producing and supplying commercial concrete
- Repairing motorcycles, vehicles, construction equipment and other mechanical products
- Exploitation of stone, sand, gravel and clay
- Manufacture of other wood products; producing products from straw, thatch and plaited materials
- Producing concrete and products from cement and plaster
- Mechanical; Metal processing and coating
- Manufacture of mining and construction machinery
- Repair of machinery and equipment
- Installation of machinery and industrial equipment
- Producing, transmitting and distributing electricity
Construction of houses of all kinds
The organization of the accounting system has not changed compared to the previous year, specifically as follows:
ABC Joint Stock Company applies the enterprise accounting system issued under the Decision No 15/2006/ QD-BTC dated 20 March 2006 of the Ministry of Finance.
The fiscal year begins on January 1 of the calendar year and ends on December 31.
The currency unit used for accounting and preparation of FSs is VND.
Trade receivables are recognized when invoices are issued, reflecting an increase in revenue, income, and receivables Revenue is only recognized when the company can reliably determine the economic benefits gained from the transaction Sales and service provisions are recognized when risks, benefits, and ownership of goods are transferred to the buyer, and ABC Company can accurately determine the related expenses The recognition of revenue occurs simultaneously with the delivery of goods or services, invoicing the customers, and the acceptance of payment by buyers.
The related party is identified as D Joint Stock Company (Parent Company).
As a longstanding client of UHY Ltd, ABC's audit process benefits from utilizing historical data on the company's legal obligations recorded in previous audit files In 2019, the auditor conducted interviews with the client to identify any recent changes and collected additional Minutes of Shareholders' Meetings and Board of Directors' Meetings to ensure up-to-date compliance and accurate financial reporting.
During 2018-2019, the auditor conducts a preliminary analysis of ABC Company's manual financial statements to identify key changes in account balances year-over-year and assess the company's ongoing financial health This initial review provides insights into abnormal fluctuations, helping to understand potential risks and the company's operational stability.
UHY auditors performed a comprehensive horizontal analysis of all balance sheet indicators and conducted vertical analysis focusing on key financial ratios These assessments are essential for enhancing understanding of ABC company's financial health and identifying significant changes compared to the previous year This detailed financial review provides valuable insights into the company's business performance and stability, supporting informed decision-making for stakeholders.
Table 2.1: Horizontal analysis – ABC Joint Stock Company
(cited for auditing accounts receivables)
4 Receivables according to the progress of construction contracts
2 Business capital in affiliated entity
5 Provision for long-term doubtful debts
Table 2.2: Vertical analysis – ABC Joint Stock Company
(cited for auditing accounts receivables)
Current ratio Current assets / Current liabilities 1,59 1,3 0,29
Quick ratio (Current assets – Inventory)/ Current liabilities
At the end of 2019, ABC’s trade receivables decreased by 22,506,286,161 VND, reflecting a 69.7% reduction compared to the beginning of the year This significant decline indicates improved capital management efficiency and a reduction in the amount of capital currently occupied.
ABC Company's accounts receivable consist exclusively of short-term receivables, predominantly arising from trade receivables, which constitute 99% of total receivables Due to its significant value, this item warrants careful scrutiny by auditors to ensure accuracy and completeness.
At the end of the year, the provision for bad debts was zero, indicating effective management and control of account receivables by ABC This may reflect the implementation of a strong receivables recovery policy that minimizes the risk of bad debts Alternatively, ABC might have opted not to allocate provisions for doubtful debts to avoid increasing costs and reducing profits During the receivables audit, it is essential for auditors to verify these practices to ensure accurate financial reporting and compliance with accounting standards.
At the end of 2019, ABC's current ratio increased slightly to 1.59 from 1.3 at the beginning of the year, indicating improved short-term liquidity Both at the start and the end of the year, the current ratio remained above 1, demonstrating ABC's continued ability to meet its short-term obligations and maintain a healthy financial position Additionally, ABC's quick ratio rose from 1.1 at the beginning of 2019 to 1.24 at year-end, reflecting strong payment ability and high liquidity for the company.
In 2019, ABC experienced a decline in trade receivables turnover, decreasing by 0.13 compared to 2018, which resulted in an increase of 10.13 days in the average collection period Although both revenue and average trade receivables decreased in 2019, the turnover rate declined even more sharply, likely due to the company's stricter credit approval processes, improved receivables management, and effective debt collection strategies Additionally, rising inflation in 2019 contributed to decreased consumer spending, further impacting the company's revenue alongside its tightened credit policies.
Understand internal control system and preliminary evaluate of control risk
As a longstanding client of UHY Ltd, ABC underwent a comprehensive audit process that involved reviewing previous audit records, utilizing detailed questionnaires, and conducting interviews with key client personnel This approach aimed to identify any significant changes in the internal control system, particularly regarding operational controls related to the establishment and fluctuation of trade receivables, ensuring the accuracy and integrity of financial reporting.
The auditor's research indicates that ABC's internal control system for trade receivables remained unchanged from the previous year, demonstrating stability The system is assessed as good, designed appropriately, and effectively aids in preventing and detecting errors and fraud To evaluate the effectiveness of ABC’s internal controls, the auditor conducts interviews with the client and distributes questionnaires, as outlined in Table 2.3.
Table 2.3 Questionnaire of ABC’s internal control system
1 Does the company have a separate accounting department and account receivables accountant?
2 Is it approved by an authorizer before accepting credit sales? X
3 Does the company have specific policies for credit sales? X
4 Does the company have specific policies for prepayment? X
5 Are account receivables monitored in detail by each object? X
6 Does the account receivables accountant conduct reconciliation trade receivables and other receivables to clients actively?
7 Are vouchers after accepting deffered payment stored carefully and managed strictly?
8 Are account receivables derived from foreign currencies tracked in original currency?
9 Does the company have regulations about provision for bad receivables?
10 Is there segregation of duties between written-off receivables approvers and written-off receivables performers?
Materiality assessment during the period of audit planning for ABC client is conducted by the auditor as follows:
The auditor determines Performance Materiality (PM) is 10% of Profit after tax.
Next, the auditor determines Materiality Percentage
MP = PM x (1 - Estimated error rate)
An estimated error rate of 20% (or 0.2). o MP = 3.072.498.132 x (1 - 0.2) = 2.457.998.506 (VND)
Auditors do not assign individual materiality levels to each item within the financial statements When summarizing audit results, if the total misstatements are below the materiality threshold (MP), they are considered acceptable and do not impact the overall fairness of the financial statements This approach ensures that minor misstatements are appropriately evaluated without unnecessarily adjusting the financial reports.
In risk assessment, auditors do not assign specific numerical values to inherent risk (IR), control risk (CR), or detection risk (DR); instead, they evaluate these risks qualitatively as high, medium, or low levels to determine their overall impact on the audit process.
Performing the audit
General summary of trade receivables from client
The auditor starts by obtaining the beginning and ending balances of trade receivables from the trial balance and the subsidiary ledger of account 131 They record the opening and closing balances from the trial balance in the appropriate columns—"Balance at Beginning of the Year" and "Balance Before Auditing"—and compare the ending balance with the total trade receivables recorded in the subsidiary ledger for 2019 Additionally, the auditor reviews working paper to assess any reclassifications or adjustment entries that need to be made, as documented in working paper , which summarizes accounts receivable from the client.
Figure 2.2 - General summary of accounts receivables from client
Client: ABC Joint Stock Company
Preparer: Hanh NT Date: 01/03/2020 Reviewer: ThaoPT Date: 01/03/2020
Objective: General summary of trade receivables
Workdone: Give general opinion on account 131
Source of information: General information from detailed working paper
Balance at the beginning of the year Volatility
TB, GL: Balance is from trial balance, matching the subsidiary ledger
PY: Match the audited financial statements of the previous year
At the end of 2019, the company's trade receivables increased due to the completion and acceptance of several construction projects Consequently, clients issued invoices to recognize revenue, leading to a rise in trade receivables and reflecting positive financial growth.
Contra account analysis of trade receivables.
The auditor performed a contra analysis of subsidiary ledger account 131 to identify any unusual contra accounts related to trade receivables, using Excel's Pivot Table function to filter relevant accounts from the Trial Balance Through this analysis of ABC Company's trade receivables, no abnormal contra accounts were detected This procedure is documented in WP - Contra account analysis of account 131.
Figure 2.3 Contra account analysis of trade receivables
Client: ABC Joint Stock Company
Subjective: Contra account analysis of trade receivables
Objective: Find unusual contra account
Source of information: Subsidiary ledger
Workdone: Skim the transactions arising on the ledger, review the contra accounts and evaluate
112101 4.652.199.400 Partial payment of debt according to final approval
131111 2.767.614.000 Transfer capital Cau Troi to Duong Troi
2412 12.945.000 Allocation of land rent to the State Budget
51111 164.135.347.640 Funds for renting houses, electricity and construction costs
111 860.180.000 Payment for workshop rent, transformer station
112 161.914.048.466 Payment for rent and constructions
131 2.767.614.000 Transfer capital Cau Troi to Duong Troi
133 2.220.000 Subtract inspection fees, allocate charges
Reconcile and analyze balance of trade receivables
In this part, the auditor compares the receivables balance at December
The auditor reviews trade receivables by comparing each customer's balance to the previous year's receivables, focusing on those with significant fluctuations or stable balances Quick analysis of fluctuations in the subsidiary ledger allows the auditor to identify accounts requiring further investigation Clients are asked to explain and evaluate large or no fluctuations, after which the auditor performs detailed tests on these balances For receivables with stable balances, the client provides a provision table to assess doubtful debt allowances In cases where the beginning and ending balances are zero but new receivables arise during the period, the auditor gathers documentary evidence to verify the existence and completeness of these amounts, ensuring they are accurately recorded.
Figure 2.4 -Reconciliation and balance analysis of trade receivables
Client: ABC Joint Stock Company
Preparer: Hanh NT Date: 01/03/2020 Reviewer: ThaoPT Date: 01/03/2020
Subjective: Reconciliation and analysis of trade receivables
Objective: Examining the no change receivables, assessing the reasonableness of making a provision
Source of information: Summary of receivables, interview client, subsidiary of account 131
Compare the balance of receivables of each subject at ending of the year with the beginning of the year
Request clients to explain and evaluate the appropriateness of the receivables balance having major fluctuations or no change Test of detail for these receivables
Compare with the provision policy of client, assess the provision of bad debts
Cod e Customer’s name Opening balance Arising balance Closing balance
Debit Credit Debit Credit Debit Credit
Outstanding receivables from previous year: 7.294.260.536
No fluctuated balance: 7,294,260,536 VND of subjects from many years ago.
The amount that made a provision is 2,032,192,864 VND
Conclusion: There is no abnormal fluctuation of trade receivables which has not been considered for making a provision
The auditor reviewed ABC's trade receivables by collecting reconciliation statements, account receivable statements, and related documents In 2019, ABC performed a debt reconciliation with its customers; however, the process was incomplete, covering only 36 of 70 customers To verify the outstanding balances, the auditor sent confirmation letters to the remaining 34 customers, receiving responses from 20 of them This thorough receivables verification process is crucial for ensuring the accuracy and completeness of ABC's financial records.
Confirmation letters are prepared by the auditor, who then sends the original copies while the client verifies and signs the documents to confirm accuracy The client is required to verify the confirmation letter before sending it back, and the auditor may request additional contact details such as the customer's address and hotline to prevent issues arising if the customer has relocated or recently filed for bankruptcy, which could hinder the collection of confirmations UHY Ltd provides standardized letter forms for confirming receivables and payables for audit purposes For instance, a confirmation letter of receivables sent to an ABC customer is included as an example.
An auditor may receive email confirmations from the ABC client, with confirmation stamps sent by ABC’s customers directly to UHY auditing firm's office For physical confirmation letters delivered to the office, the auditor can review and summarize these documents after the completion of ABC’s working day This process ensures efficient confirmation management and supports accurate audit documentation.
The auditor reviews the debt reconciliation records and verifies the ending balances listed in the subsidiary ledger for account 131 Confirmation letters are sent and responded to, ensuring the existence and accuracy of the reported amounts This process helps validate the reliability of the company’s debt records and maintains financial statement integrity.
The above procedure is shown on Test of detail the balance of trade receivables
Floor 6, No 138 Pham Van Dong Street, Xuan Dinh Ward, Bac Tu Liem District, Ha Noi
CONFIRMATION OF RECEIVABLES To: BAC SON JOINT STOCK COMPANY
Please confirm the accuracy of the financial statements of BAC SON JOINT STOCK COMPANY for the year ending December 31, 2019, by providing the necessary information to our independent auditors at UHY Auditing and Consulting Co., Ltd., as part of the upcoming financial audit process.
1 Our receivables from your Company: 624.031.000
Please send the requested information by email and courier the original to our auditors at the following address:
UHY Auditing and Consulting Company Limited,
5th Floor, B2 Tower, Roman Plaza, To Huu Road
Nam Tu Liem District, Hanoi, Vietnam
Email: Hanhnt@uhyvietnam.com.vn Tel : (84).024 3 755 7446 Fax : (84).024 3 755 7448
Your prompt attention to this request will be appreciated.
1 We confirm that the information provided above is complete and accurate as of the date indicated
2 We do not agree with the information provided above The details are as follows: Company’s seal
Figure 2.6 Test of detail the balance of trade receivables
Client: ABC Joint Stock Company
Subjective: Test of details of trade receivables
Objective: Evaluate the existence, completeness, classification Examining the no change receivables, evaluate the appropriateness of the provision
Source of information: Summary of receivables, Interview client, trade receivables document
Sample a selection of subjects involved in regular or high-value transactions, and thoroughly review the subsidiary ledgers for each type of receivables to ensure accuracy Additionally, all trade subjects related to related-party transactions should be comprehensively identified and examined to maintain financial transparency and compliance.
Reconcile the balance with receivables reconciliation Sample and send a confirmation letter to customers.
Customer’s name Ending balance Confirmation letter Note
Note: The customers who has no receivables reconciliation
Conclusion: Except for the above problems, trade receivables's balance is completeness, existence and reasonably classification in material respects
The auditor compared the debt reconciliation figures with the ending balance in the subsidiary ledger for Account 131, resulting in a reconciliation ratio of 75.23% for the debit balance and 73.46% for the credit balance These ratios indicate the accuracy of the account balances and highlight areas that may require further review to ensure financial statement completeness Maintaining high reconciliation ratios is essential for verifying the integrity of the company's financial records and ensuring compliance with accounting standards.
The auditor selected 70 customers of ABC company to send confirmation letters and received 51 responses confirming the accuracy of the debt receivables, representing 75% of total trade receivables with a total confirmed amount of 52,368,987,506 VND For the unresponsive accounts, the auditor chose not to send second confirmation letters but instead performed alternative audit procedures, such as verifying payments received after the balance sheet date in subsequent steps.
When analyzing the balance of Account 131, the auditor sample 5 customers who paid full of their debt payable for ABC company after balance sheet date.
Examine payment after Balance sheet date
The auditor reviews the subsidiary ledgers for cash, bank deposits, and trade receivables from clients collected after the fiscal year-end Accountants typically provide these subsidiary ledgers for January and February to ensure accurate financial data This process is essential for verifying the completeness and accuracy of the company's financial records.
In 2020, auditors reviewed documents related to payments made after the balance sheet date to gather additional evidence of ABC's receivables from clients as of December 31, 2019 Although this procedure has been replaced when the auditor cannot obtain all confirmation letters, sending confirmation letters remains a priority in the audit of trade receivables The auditor selected 10 items to test, as detailed in WP – Payment after the balance sheet date This process resulted in a 2% increase in verification rate on the debit side of Account 131, enhancing the overall audit evidence.
Figure 2.7 Payment after the balance sheet date
Client: ABC Joint Stock Company
Preparer: Hanh NT Date: 01/03/2020 Reviewer: ThaoPT Date: 01/03/2020
Subjective: Test of detail the payment after the closing date for receivables
Objective: Evaluate the existence and completeness
Our team reviews the subsidiary ledger for cash, deposits, and receivables debts recorded after the balance sheet date to ensure accurate financial reporting We reconcile the paid amounts with the outstanding balances to verify their consistency and identify any discrepancies Additionally, we thoroughly check the validity of payment vouchers to confirm the truthfulness of each transaction, ensuring the integrity of the financial records.
Customer’s name Ending balance (Debit) The payment after BS date
Thanh Phat Limited Company 468.599.000 110.223.569 Binh Xuyen Contruction Joint
Ha Thanh Limited Company' 214.241.572 34.201.520 Construction No.8 Thang Long
PVC Joint Stock Company 201.000.000 92.500.000 Road management area No.1 312.509.000 130.145.700 Technology development
Examine balance of receivables derived from foreign currencies
Completing the audit
During the trade receivables audit of ABC Joint Stock Company, auditors compile their findings and report them to the senior auditor for review The senior reviews the working papers, discusses potential errors with team members, and summarizes the overall audit results After combining these findings, the auditor discusses key issues with the client that require corrective action, ultimately forming a final opinion on the financial statements The audit results are then documented in the official audit report.
Figure 2.11 Summary of trade receivables
Client: ABC Joint Stock Company
Preparer: Hanh NT Date: 01/03/2020 Reviewer: ThaoPT Date: 01/03/2020
Subjective: Summary of trade receivables
Objective: Provide general opinion on trade receivables
Source of information: Summary detailed information detailed working paper
Workdone: Working paper, Subsidiary ledger of trade receivables, trial balance
Acc Name Before audited Adjusted amount
Balance is from trial balance, matching the subsidiary ledger
Match the audited financial statements of the previous year
2 The foreign currency receivables after adjustment are reflected appropriately
3 Receivables reconciliations have been performed at BS date but not sufficient
Confirmation letter Payment after BS date Trade receivables (Dr)
4 All trade receivables are short-term receivables
5 The company has not made a provision The auditor gives adjustment entry:
Conclusion: Trade receivables reflect true and fair view in material respect