Trade-Receivables

SBS Hyderabad 18thmay 2019 Audit for Trade Receivables by Raghuram dasam [email protected] 9642249992

Topics to be covered 1. What are Trade Receivables? 2. Importance of Trade Receivables 3. What is Trade Receivable Management? 4. Process involved in Trade Receivable Management 5. Trade Receivable Aging 6. Benefits of Aging 7. Internal audit check list for Trade receivables 8. External Confirmation check list 9. Audit procedure for Trade Receivables 2 [email protected] www.sbsandco.com 9642249992

What are Trade Receivables ?  Trade Receivables which arises due to selling of the goods or services rendered by the Entity to its Customers on credit  Since this is an amount which the Entity has a legal claim over its Customer and also the Customer is bound to pay the same to Entity, it is classified as Current Asset in the Balance sheet of the Entity  Trade receivables and Accounts receivables are used interchangeably in the industry. 3 [email protected] www.sbsandco.com 9642249992

Why are Trade receivable important?  The idea behind providing a credit facility to the customers is to facilitate and ease the process of the transaction and establish a strong credit relation between the parties involved  It may lead to better deals or increase the chances of improving the working capital management  As Trade receivables form a major part of the organization’s asset, it leads to the generation of cash in-flow in the books of the organization 4 [email protected] www.sbsandco.com 9642249992

What is Trade receivable management?  Trade receivable management is the process of ensuring that customers pay their dues on time. It helps the businesses to prevent themselves from running out of working capital at any point of time.  It also prevents overdue payment or non-payment of the pending amounts of the customers. It builds the businesses financial and liquidity position  A good receivable management contributes to the profitability by reducing the risk of any bad debts. Management is not only about reminding the customers and collecting the money on time, it also involves identifying the reasons for such delays and finding a solution to those issues. 5 [email protected] www.sbsandco.com 9642249992

What is the process involved in Trade receivable management? The Trade receivable management process involves the following :  Credit rating i.e the paying ability of the customers shall be reviewed before agreeing to any terms and conditions  Continuously monitoring any risk of non-payment or delay in receiving the payments  Addressing the complaints of the customers  After receiving the payments, the balances in the particular account receivable should be reduced  Preventing any bad debts of the receivables outstanding during a particular period. 6 [email protected] www.sbsandco.com 9642249992

Trade Receivable Aging Trade receivable aging is the process of categorizing all the amounts owed by all our customers, including the length of time the amounts have been outstanding and unpaid .The example of such categories for this type of report include:  1 to 30 days: Invoices in this group are between 0 and 30 days past their due date  31 to 60 days: Invoices in this group are between 31 and 60 days past their due date  61 to 90 days: Invoices in this group are between 61-90 days past their due date  91 days and above: Invoices in this group are above 90 Past their due date 7 [email protected] www.sbsandco.com 9642249992

Benefits of Trade Receivables Aging Trade receivable aging reports provide the following benefits:  Regular contact reduces the late payments from customers and makes us to perform optimally in our collection process.  Instead of having to regularly write off bad debts, you can make the determination to stop providing goods or services before late payment becomes an issue. Make sure to include the following in your report:  Customer information and statements.  Status of collection, total amount outstanding, activity and financial history for each customer. 8 [email protected] www.sbsandco.com 9642249992

Internal Audit Check List  Ensure all payments are being processed correctly and banked promptly – ensure no delays to cash flow.  Attempt to identify any clients who show signs of becoming slow payers (eg. Timing between payments becoming greater or unwilling to be bound to terms of payment)  Potential bad debt cases should be identified as soon as possible to minimize the amounts that could be lost  Review all accounts outstanding greater than 30 days and ensure action is being taken 9 [email protected] www.sbsandco.com 9642249992

External Confirmation Check list Documents to be obtained: 1. Confirmations from 3rd party ( electronically or physically) 2. Whether samples are selected for getting confirmations? 3. Select to whom the confirmation has to be sent ? 4. Whether the confirmation request is properly designed or not ? 5. Do a proper follow up process till the confirmations are received 10 [email protected] www.sbsandco.com 9642249992

Audit Procedure for Trade receivables Completeness:  To ensure that there are no unrecorded trade receivables  Match the total of the aged receivables listing to the sales ledgers control account  Complete the disclosure checklist to ensure that all the disclosures relevant to receivables have been made 11 [email protected] www.sbsandco.com 9642249992

Audit Procedure for Trade receivables Occurrence:  The assertion is that disclosed transactions have indeed occurred  For a sample of sales transactions recorded in the ledger, vouch the sales invoice back to customer orders and dispatch documentation.  Determine, through discussion with management, whether any receivables have been pledged, assigned or discounted and whether such items require disclosure in the financial statements. 12 [email protected] www.sbsandco.com 9642249992

Audit Procedure for Trade receivables Existence:  To ensure that the trade receivables are actually in existence at a given date or at the year-end date.  Review after-date receipts by inspecting bank statements and cash receipts documents.  Inquire from management explanations for invoices remaining unpaid after subsequent ones have been paid.  Observe whether the balance on the account is growing and if so, find out why by discussing with management. 13 [email protected] www.sbsandco.com 9642249992

Audit Procedure for Trade receivables Classification:  To ensure that all transactions have been recorded within the correct accounts in the general ledger.  Take a sample of sales invoices and examine for proper classification into revenue accounts.  Review the aged analysis of receivables for any large credits, non-trade receivables and long-term receivables and consider whether such items require separate disclosure. 14 [email protected] www.sbsandco.com 9642249992

Audit Procedure for Trade receivables Presentation and Disclosure: Whether Trade receivables properly presented under the heading Current assets in Balance Sheet. Whether complied with below mentioned disclosure requirements: 1. Aggregate amount of Trade Receivables outstanding for a period exceeding six months from the date they are due for payment should be separately stated. 2. Trade receivables shall be sub-classified as a. Secured, considered good b. Unsecured, considered good c. Doubtful 3. Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately 15 [email protected] www.sbsandco.com 9642249992

At Raghuram dasam [email protected] SBS Hyderabad 9642249992 Our Presence: Hyderabad, Kurnool, Nellore, TADA, Vizag & Bengaluru: [email protected]; 040-40183366 Disclaimer: Please logon to: http://www.sbsandco.com/disclaimer/ Read our monthly SBS e-Journals 16 [email protected] www.sbsandco.com/wiki www.sbsandco.com www96.4s2b24s9a99n2dco.com/digest