Part (c) Describe the additional substantive audit procedures that the external auditor of RainbowT should perform relating to the accuracy, occurrence and completeness of the debtors’ age analysis as at 30 June 2021. The following procedures have been performed on the accuracy, occurrence and completeness of the debtors’ age analysis: Obtaining all client schedules supporting the classes of transactions and account balances. Re-performing the casts and cross-casts on these schedules. Agreeing the closing balance of these schedules to the amounts in the general ledger, trial balance and annual financial statements. Agreeing the opening balance of these schedules to the prior-year workpapers and audited financial statements. Obtaining a signed management representation letter regarding the accuracy and completeness assertions relating to the classes of transactions and account balances being audited. Considering the effectiveness of internal controls regarding classes of transactions and account balances and its impact on the nature, timing and extent of the substantive procedures.
answer
Shorter Version of the Dumbed-Down Version
The auditor's job is to prove the list of people who owe the company money is correct. They do this by:
Inspecting bills: Checking individual customer bills (invoices) to make sure the amounts and dates are correct.
Using a computer: Running reports to find fake customers or duplicate entries.
Checking bank records: Tracing payments received after the year-end to confirm the debts were real.
Asking customers directly: Sending letters to customers to confirm the amount they owe.
Looking for weird numbers: Comparing the total money owed to total sales to spot anything unusual.
Based on the images provided, here is an explanation of the substantive audit procedures for a debtors' age analysis, a "dumbed-down" version, and a shorter version of the "dumbed-down" explanation.
Dumbed-Down Version
An auditor needs to check if the list of people who owe the company money is correct. This list is called the debtors' age analysis. The auditor wants to make sure the money owed is real, the amounts are right, and the list is complete.
Here's how they do it:
Check the list: The auditor gets the list of who owes money and checks it against the list from last year to see if there are any strange or new people on it.
Look at the bills: They get the actual bills (invoices) that were sent to customers. They check a few bills to make sure they were properly signed, the dates are right, and the amount owed is put into the right category (like 'due in 30 days' or 'overdue by 90 days').
Use a computer: They use a special computer program to check the entire list for fake customers or mistakes, like people being listed twice. They also use it to find people who haven't paid in a very long time, as this could mean the company won't get the money.
Check bank statements: They look at the company's bank statements after the year-end to see if customers have paid their bills. This proves the money was actually owed.
Check credit notes: They check the notes given to customers for returning goods to make sure they're correct and haven't been used to hide mistakes.
Ask the customers: This is the most important step. They send letters to a few customers asking them to confirm how much they owe. This is a direct way to prove the debt is real. * Check for odd numbers: They compare the total amount of money owed to other numbers, like total sales, to see if anything looks strange. For example, if the amount owed is much higher than usual, it could be a warning sign.
Check bad debts: They make sure that any money the company has given up on getting (bad debts) has been properly removed from the list.
Explanation of the Solution
The images outline a comprehensive set of substantive audit procedures for an external auditor to perform on a company's debtors' age analysis. The primary goal of these procedures is to ensure that the aged debtors' listing is accurate, complete, and correctly reflects the existence of the debts. The procedures relate to various audit assertions, which are claims made by management in the financial statements.
Key Procedures and Assertions
Obtaining and Comparing the Debtors' Age Analysis: The auditor first obtains the debtors' age analysis and compares it to the previous year's and master file data. This helps identify any new debtors, ensuring their validity and existence. This addresses the assertion of existence and completeness.
Verifying Individual Invoices: The auditor obtains a list of all invoices making up the balance for each debtor. A sample of these invoices is then selected and inspected to confirm the details, such as the customer signature, and to re-calculate the aging of the debt. This confirms the accuracy and existence of the debts and ensures the debt is allocated to the correct time bucket (e.g., 30 days, 60 days).
Using Computer-Assisted Audit Techniques (CAATs): CAATs are used to test the entire population of debtors. For example, a report can be generated to identify fictitious or duplicate customers, addressing the existence assertion. Another CAAT report can identify long outstanding invoices (over 90 days), helping to assess the risk of non-payment and potential bad debts. This tests the completeness and occurrence of the transactions.
Confirming Subsequent Payments: The auditor requests bank statements after the year-end to trace payments received from debtors. This provides strong evidence for the existence of the debt at the year-end. By tracing receipts to the oldest invoices, the auditor can also check if the company's application of payments is corrupting the age analysis. This addresses the accuracy assertion.
Testing Credit Notes and General Journals: The auditor selects a sample of debtors and inspects credit notes to ensure they were correctly issued for goods returned, which confirms the occurrence of these transactions. Additionally, inspecting the general journal for unusual entries related to debtors helps identify any fraudulent or incorrect transactions. This addresses the validity of the entries.
Analytical Procedures: The auditor performs analytical procedures, such as comparing the debtors' balance as a percentage of sales, to identify any unexpected or unusual variations. This can signal potential misstatements or risks. This is a high-level check on the overall reasonableness of the balances.
Debtors' Confirmations: This is a crucial procedure. The auditor sends letters to a sample of outstanding debtors, asking them to confirm the balance they owe the company. This provides direct, external evidence of the existence and accuracy of the debt.
Bad Debts Written Off: The auditor inspects a listing of bad debts that were written off to ensure they have been correctly removed from the age analysis. This ensures the age analysis is accurate and that the company is properly managing its uncollectible accounts.
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