Tuesday, June 29, 2010

#90- Review of Credit Term

One of the audit procedures to be performed while reviewing trade debtors balance is to review the credit term given to the customers (i.e. debtors).

To illustrate, we can obtain list of trade debtors, including: credit term given to respective trade debtors, and compare the credit term given to the norm of the industry. We would inquire our audit clients, if credit terms given are unusually long.

For instance, the norm of the credit term in industry A is 90 days. ABC company ( our audit client) allows a credit term of 180 days to customer XYZ. We will have to find out the underlying business reason of giving relatively longer credit term, and evaluate the collectibility of amount owing from customer XYZ.

Analyzing credit term given can be used as a useful tool in understanding the credit policy of our audit client.