CA Inter Audit & Ethics Notes

Chapter 5 – Audit of Items of Financial Statements

Part 3 – Audit of Trade Receivables & Cash and Cash Equivalents

3.4 AUDIT OF TRADE RECEIVABLES

Meaning

Trade Receivables (Debtors) represent amounts due from customers arising from the sale of goods or services on credit.

When a credit sale is made:

Sales are recorded in the Statement of Profit & Loss.
The corresponding amount is shown as Trade Receivables in the Balance Sheet.

If the amount becomes irrecoverable, it is written off as Bad Debt.

Internal Controls over Trade Receivables

Before performing substantive procedures, the auditor evaluates the effectiveness of internal controls over sales and debtors.

Key Internal Controls

✔ Only genuine (bona fide) sales are recorded.

✔ Sales are made only to approved customers.

✔ All sales are properly recorded.

✔ Receivables are settled only through authorised receipts.

✔ Proper segregation of duties between:

Sales
Accounting
Cash collection
Follow-up

✔ Timely collection of debts.

✔ Regular follow-up and reminders.

✔ Adequate ageing analysis.

✔ Proper provision for doubtful debts.

Assertions Covered

Existence
Completeness
Valuation
Presentation & Disclosure

A. EXISTENCE

Objective:

Ensure that receivables shown in the Balance Sheet actually exist.

Audit Procedures

1. Review Internal Controls

Check that:

Duplicate invoices cannot be generated.
Invoices automatically create debtor balances.

2. Ageing Report

Obtain:

Accounts Receivable Ageing Schedule

Verify:

Ageing Report ⇄ General Ledger

3. Invoice-wise Realisation

Ensure collections are adjusted invoice-wise.

If receipts are adjusted on account basis,

obtain customer confirmations.

4. Old Outstanding Balances

If large balances remain unpaid for a long period,

auditor should:

Ask reasons.
Evaluate recoverability.

External Confirmation (Most Important)

SA 505 – External Confirmations

This is one of the most important audit procedures for debtors.

Auditor should:

Obtain direct confirmation from customers.

Confirmation should cover:

Large balances
Selected small balances

Types of Confirmation

(1) Positive Confirmation

Customer replies whether balance agrees or disagrees.

Most reliable.

(2) Blank Confirmation

No balance is mentioned.

Customer writes balance as per own records.

Most reliable because chances of manipulation are minimal.

⭐ ICAI Favourite Point

Selection of Customers

Selection should remain confidential until trial balance is received.

Auditor’s Responsibility

Auditor should control:

Preparation
Dispatch
Receipt

Confirmation should come directly to auditor.

If Differences Exist

Company should investigate.

Auditor verifies reconciliation.

No Reply Received

Perform Alternative Audit Procedures:

Verify subsequent collections.
Examine invoices.
Examine dispatch documents.
Review customer ledger.

Related Party Receivables

Verify:

Approval
Arm’s Length Price
Recoverability

Comply with:

AS 18
Ind AS 24

Analytical Procedures

Compare:

Sales trend
Debtor trend
Collection Period
Debtors Turnover Ratio

Investigate unusual fluctuations.

B. COMPLETENESS

Objective:

Ensure no receivable has been omitted.

Cut-off Testing

Very important.

Auditor checks invoices issued near year-end.

Verify:

Goods dispatched before year-end

✔ Included

Goods dispatched after year-end

❌ Not included

Last 5 Days Test

Examine invoices issued during last five days of the reporting period.

Dispatch Register

Compare:

Invoice Date ⇄ Dispatch Date

Bill and Hold Sales

Meaning:

Customer billed.

Goods remain with seller.

Auditor verifies:

Whether sale recognition is appropriate.

Customer Returns

Review returns after year-end.

Large returns may indicate fictitious sales.

Discounts

Verify:

Discounts follow company policy.

Credit Notes

Review:

Approval
Timing
Reason

Check whether credit note relates to current year.

C. VALUATION

Objective:

Receivables should be recoverable.

Provision for Doubtful Debts

Verify:

Method used by company.

Compare with previous year.

Obtain:

Ageing Analysis

Including:

Debit balances
Credit balances

Litigation Cases

Obtain list of debtors under litigation.

Assess recoverability.

Doubtful Debts

Discuss with management.

Perform further testing where necessary.

Provision

Ensure provision is adequate.

Bad Debts

Prepare movement schedule:

Opening Provision

New Provision

– Write-offs

= Closing Provision

Compare with previous years.

Write-offs

Must be approved by competent authority.

For companies:

Normally Board of Directors.

D. PRESENTATION & DISCLOSURE

Foreign Currency Receivables

Restate as per:

AS 11

Related Party Disclosure

Verify compliance with:

AS 18
Ind AS 24

CARO

Transactions covered under Section 189

must be reported appropriately.

Schedule III Disclosure

Trade Receivable Ageing

Separate disclosure for:

Less than 6 months
6 months–1 year
1–2 years
2–3 years
More than 3 years

Separate Classification

Undisputed – Good
Undisputed – Doubtful
Disputed – Good
Disputed – Doubtful

Additional Disclosure

Unbilled Receivables
Secured
Unsecured
Doubtful
Allowance for Bad Debts

Separate Disclosure

Receivables due from:

Directors
Officers
Firms where directors are partners
Private companies where directors are interested

Exam Mnemonic

E C V D

E → External Confirmation

C → Cut-off

V → Valuation

D → Disclosure

3.5 AUDIT OF CASH & CASH EQUIVALENTS

Meaning

Cash & Cash Equivalents include:

Cash in Hand
Petty Cash
Bank Balances
Current Accounts
Fixed Deposits
Cheques in Hand
Stamps
Margin Money
Debit Balance in Cash Credit Account

These are highly liquid assets and are highly susceptible to fraud and misappropriation.

Assertions

Existence
Completeness
Valuation
Presentation

A. EXISTENCE & COMPLETENESS

Surprise Cash Verification

Most important audit procedure.

Cash should be verified:

✔ On Balance Sheet Date

AND

✔ On another surprise date after year-end.

Purpose:

Prevent temporary arrangement of cash.

Multiple Cash Locations

If company has:

Main Cashier
Petty Cashier
Branch Cash

Verify all simultaneously.

Purpose:

Prevent transfer of cash from one location to another.

Presence of Cashier

Cashier should remain present during counting.

Cashier signs Cash Count Sheet.

Rough Cash Book

Compare:

Rough Cash Book ⇄ Main Cash Book

Temporary IOUs

If IOUs or cash vouchers are included,

verify:

Approval
Proper accounting

Cash Sensitivity Analysis

Compare monthly:

Cash Receipts
Cash Payments

Investigate unusual fluctuations.

Bank Reconciliation Statement (BRS)

Obtain BRS for every bank account.

Ensure:

BRS is signed by authorised official.

Audit of BRS

Verify:

1. Bank Balance

Cash Book ⇄ Bank Statement

2. Cheques Issued but not Presented

Verify:

Subsequent clearance.

3. Stale Cheques

If cheque remains outstanding for more than 3 months,

It should not continue in BRS.

Amount should be reversed.

4. Cheques Deposited but not Credited

Verify through subsequent bank statements.

5. Bank Confirmation

Obtain direct confirmation from bank wherever required.

Valuation

Verify:

Foreign currency bank balances (AS 11)
Interest on deposits
Fixed deposit maturity
Correct classification

Presentation & Disclosure

Ensure proper disclosure of:

Cash in Hand
Balances with Banks
Earmarked Balances
Margin Money
Fixed Deposits
Cash Equivalents

As required under Schedule III of the Companies Act, 2013.

One-Day Revision

Trade Receivables

✔ Internal Controls

✔ External Confirmation (SA 505)

✔ Positive & Blank Confirmation

✔ Alternative Procedures

✔ Cut-off Testing

✔ Bill & Hold Sales

✔ Customer Returns

✔ Provision for Doubtful Debts

✔ Ageing Schedule

✔ Related Party Receivables

✔ Schedule III Disclosure

Cash & Cash Equivalents

✔ Surprise Cash Count

✔ Simultaneous Verification

✔ Cashier’s Signature

✔ Rough Cash Book

✔ IOUs

✔ Cash Sensitivity Analysis

✔ BRS Verification

✔ Stale Cheques (>3 Months)

✔ Cheques Deposited but Not Credited

✔ Bank Confirmation

✔ Schedule III Disclosure

Important Standards & Sections

Standard / Provision	Relevance
SA 505	External Confirmations for Trade Receivables
AS 11	Foreign Currency Receivables & Bank Balances
AS 18 / Ind AS 24	Related Party Receivables
Section 189, Companies Act, 2013	Register of Contracts involving Directors
Schedule III	Ageing, Classification & Disclosure Requirements

Part 3 covers approximately pages 37–48 of the chapter. The next part will cover Inventory, Property, Plant & Equipment (PPE), and Investments, which are highly important from the ICAI examination perspective.