Examination of Records

1. 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.
2.  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.
3.  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.
4.  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 debts, 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 by him, he may still not pay the same.

The following are some of the indications of doubtful and uncollectible debts, loans and advances:

1. The terms of credit have been repeatedly ignored.
2.  There is stagnation, or lack of healthy turnover, in the account.
3.  Payments are being received but the balance is continuously increasing.
4. Payments, though being received regularly are quite small in relation to the total outstanding balance.
5.  An old bill has been partly paid (or not paid), while later bills have been fully settled.
6.  The cheques received from the debtors have been repeatedly dishonoured.
7.  The debt is under litigation, arbitration, or dispute.
8.  The auditor becomes aware of unwillingness or inability of the debtor to pay the dues, e.g., a debtor has either become insolvent, or has closed down his business, or is not traceable.
9. Amounts due from employees, which have not been repaid on termination of employment.
10. Collection is barred by statute of limitation.
11.  Bad debts written off or excessive discounts or unusual allowances should be verified with the relevant correspondence. Proper authorization should be inspected.
12.  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.
13.  The auditor should examine whether contingent liability, if any, in respect of bills accepted by customers and discounted with the banks is properly disclosed. He should also examine whether adequate provision on this account has been made, where required.