a) The auditor should carry out an examination of the relevant records himself about the validity, accuracy and recoverability of the debtor balances. The extent of such examination would depend on the auditor’s evaluation of the efficacy of internal controls.
Following basic procedures should be followed while examining the records to verify the debtors of the company.
i) The auditor should check the agreement of balances as shown in the schedules of debtors with those in the ledger accounts. He should also check the agreement of the total of debtor balances with related control account. Any differences in this regard should be examined.
ii) Verification of subsequent realizations is a widely used procedure, even in cases where direct confirmation procedure is followed. In the case of significant debtors, the auditor should also examine the correspondence or other documentary evidence to satisfy himself about their validity and accuracy.
iii) While examining the schedules of debtors with reference to the debtors’ ledger accounts, the auditor should pay special attention to the following aspects:
Where the schedules show the age of the debtors, the auditor should examine whether the age of the debts has been properly determined.
Where the amounts outstanding are made up of items which are not overdue, having regard to the credit terms of the entity.
Whether transfers from one account to another are properly evidenced.
Whether provisions for allowances, discounts and doubtful debts should recognise that even though a debtor may have confirmed the balance due him, he may still not pay the same.
iv) Bad debts written off or excessive discounts or unusual allowances should be verified with the relevant correspondence. Proper authorization should be inspected.
v) In the case of claims made against insurance companies, shipping companies, railways etc., the auditor should examine the correspondence or other available evidence to ascertain whether the claims have been acknowledged as debts and there is a reasonable possibility of their being realized. If it appears that they are not collectible, they should be shown as doubtful. Similar considerations apply in respect of claims for export incentives, claims for price escalation in case of construction contracts, claims for interest on delayed payments, etc.
vi) The auditor should examine whether contingent liability, if any, in respect of bills accepted customers and discounted with the banks is properly disclosed. He should also examine whether adequate provision on this account has been made, where required.