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(a) Explain why auditors carry out circularisation of debtors. (b) Distinguish between positive and negative debtors circularisation procedures. (c) Describe in...

      

(a) Explain why auditors carry out circularisation of debtors.
(b) Distinguish between „positive? and „negative? debtors circularisation procedures.
(c) Describe in detail the work you would carry out in scrutinizing the replies to the debtors circularisation and in confirming whether the debtors balances are collectable in the following situations:
i. where the debtor does not agree with the balance and states a difference; (6 marks)
ii. where the debtor reports that he cannot confirm the balance
iii. where no reply is received from the debtor

  

Answers


johnson
a)The most effective way of confirming debtor balances is by the auditor communicating directly with the customers of the client to seek direct confirmation of the amounts outstanding.
Circularization satisfies the following objectives: -
- Strong evidence whether debtors are overstated – Customers can usually be relied upon to complain if the balance they are supposed to owe is overstated (i.e. completeness and accuracy). However, it is a weaker source of evidence on whether debtors are understated – customers are less likely to kiliicomplain if the balance is too small.
- Evidence of the functioning of controls i.e. if the ICS over debtors is strong, there will be few discrepancies regarding what is stated by the debtors and what is stated in the clients records
- Evidence of the efficiency of cut-off procedures if carried out at year-end.
- Evidence regarding irregularities such as “teeming and lading” and window dressing.
- Provides reliable evidence on existence of debtors.

b) In positive circularization the debtor is asked to confirm to the auditor directly if he agrees or disagrees with the balance whereas in negative circularization, the customer is only asked to respond if he disagrees with the balance stated in the request letter. Positive circularisation is mainly used where the debtors? balances are material and the internal controls are not very reliable while negative circularisation is mainly used where the debtors? balances are not very significant.

c) Debtors? circularisation
i) Where the debtor does not agree with the balance and states a different balance
The fact that the debtor has replied and stated a different balance confirms the existence of the debtor. However, the auditor will need to carry out the following procedures to confirm completeness, accuracy and collectability of the debt:
- Evaluate the causes of the difference between the balance in the client?s ledger and the amount the debtor has confirmed. This could be as a result of either invoices or payments in transit.
Invoices in transit refers to instances where the client has sent invoices for sales to the customer but these have not been recorded in the customer?s books. Payments in transit refers to instances where the debtor has made some payments but these have not yet reached the client or maybe the client has received the payment but has not posted this in the ledger. Where payments has received the payment the client will need to post these in the ledger;
- Other variances should be investigated and management should provide appropriate explanations. Where necessary adjustments should be made record any unrecorded transactions;
- Check any payments received after year end as evidence of collectability of the debtors balance;
- Analyse the account to confirm that the balance is within the credit terms and discuss with management the recoverability of the balance.

ii) Where the debtor reports that he cannot confirm the balance
- The fact the debtor has replied confirms existence;
- To confirm the completeness of the amount the auditor should analyse the debtors account to ensure that the balance is made of specific invoices supporting sales to the debtor;
- The auditor should discuss with management the collectability of the balance.

iii) Where no reply has been received
Where no reply has been received implies that the auditor has not been able to confirm the existence of the debtor. The auditor will need to carry out alternative audit procedures, which include:
- Inspecting correspondence between the client and the debtor. This will assist in confirming existence of the debtor;
- Analysing the debtor?s account to verify that the balance is made up of specific invoices. The auditor can inspect a sample of these invoices;
- Verifying if there are any payments that have been received after the year-end. This will confirm existence and collectability of the balance. Where the entire amount has been settled in one single payment this could also assist in confirming the completeness of the balance;
- The auditor should discuss the account with management if there are any indications that the balance is doubtful.
johnson mwenjera answered the question on March 28, 2018 at 08:18


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