Saturday, February 7, 2015

Audit - debt overdue more than one year

This is going to be a post that involves significant judgements.

As previously discussed, auditor would review management assessment relating to doubtful debt, where we understand the normal debts turnover (day) and identify the long outstanding debtors for further review and discussion. For instance, auditor would pick material overdue debts aged more than 90 days if normal turnover is about 60 days.

What if you noted a debtor, whose debt is overdue more than a year and with no provision? Is this a straight away action when we push the client to provide allowance for doubtful receivale in full?

Your audit client may come back to you on their assessment / story / justification on why no allowance is required. This then involves auditor to test management's justification. Test the subsequent receipt, test the story of the long standing customer by researching online etc etc.

This matter is always not straight forward and with lot of uncertainty. If there's no subsequent receipt, what should auditor do if management insist that the amount can be recovered in full. Based on experience, we would require client to pass an allowance amount equals to 50% of gross amount to demonstrate that we understanf mangement justification, but due to uncertainty - management should provide 50% allowance.

Usually, this is easier for client to accept. Note: the percentage determined is judgemental and varies among different auditors.

It is also important to disclose management process of assessing allowance for doubtdul receivable as a process involves significant judgement in the financial statement.

As the number years of audit experience, the auditors tend to be able to make judgemental call that can reflect the business substance better. Hence, pls discuss this matter with the audit partner as well.

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