Complete guide on trade receivables audit and disclosure requirement for AS complaint and Ind AS complaint entities as per latest amendment in companies Act, 2013
This topic covers the step-by-step guidance on designing and performing the substantive procedures for the trade receivables and the disclosure and presentation requirement for the trade receivables as per the Companies Act, 2013.
Trade receivables refers to amount that is due on account of goods sold or service rendered in the normal course of business and the company has unconditional right on such amount of consideration. This may be current trade receivables and non-current trade receivables. For the trade receivables to be classified as current we have to satisfy the following conditions:
a) It is expected to be realized in the company’s normal operating cycle;
b) It is expected to be realized within 12 months after the reporting date
All the other trade receivables not satisfying the above two conditions should be classified as non-current trade receivables.
Objectives of auditing trade receivables and assertions as per Standard on auditing 315
i) Existence assertion:- All the trade receivables claims on the balance sheet are real.
ii) Completeness assertion:- All the trade receivables of the entity are included on the balance sheet
iii) Valuation assertion:- Trade receivables are carried at the net realizable value
iv) Rights and obligations assertion:- The entity owns, or has a legal right to, all the trade receivables on the balance sheet at the balance sheet date.
v) Presentation and disclosure assertion:- Trade receivables are properly classified, described, and disclosed in the financial statements, including notes, in accordance with the applicable financial reporting framework.
Following are the primary substantive procedure (PSPs) we should perform for auditing the trade receivables
1) Agreement of Trial balance amount of trade receivables with the subledger balance :- We should obtain the subledger balance of the trade receivables and tie out whether the balance of the subledger tied with the trade receivables balances of the trial balance. This is the initial step before starting the detailed auditing of trade receivables. In case it does not tied back with the trade receivables balance of trail balance, obtain the reconciliation of the variance between the subledger balance and balance mentioned in trial balance.
2) Verification of existence of trade receivables:- We may decide to classify the trade receivables population and perform different level and types of testing on each classification of population. These testing may be confirmation request, analytical review, testing of invoice, testing of cash receipt from the debtors, etc.
We may classify the total trade receivables populations into following categogy:
I) Large balance trade receivables:- We may identify the large account balance trade receivables on the basis of materiality amount defined for the audit. For the large balance receivables, we may obtain the external confirmation directly from the debtors. SA 505 also deals with the external confirmation, auditor can use the external confirmation as a means of obtaining audit evidence. Incase management refuses to allow the auditors to send a confirmation request, auditor should inquires the management for refusing for the external confirmation. If the reasons are justifiable, we shall perform the alternative procedures like testing the invoices raised and receipt of the amount related to that invoice in the bank account from the debtors.
II) Individually insignificant account but are significant if all the insignificant account is combined together:- We should obtain the sample from the population and obtain the confirmation. Incase confirmation is not received or feasible we shall perform the alternative procedures like testing the invoice and receipt of the amount related to that invoice in the bank account from the debtors.
III) Disputed trade receivables and old unpaid account:- Enquire the management for the current status of these accounts, management effort for the collection of these debtor balances, consider whether provisions are required for these accounts.
IV) Trade receivables account with negative balance:- Investigate the significant credit balance to determine reasons for the negative balance and establish how management is dealing with these accounts. Auditor should apply the professional judgement whether the confirmation of some of these accounts are required.
3) Trade receivables cut off:- We should perform the cut off testing of trade receivables to ensure that the trade receivables recorded in the financial statement is actually pertains to the reporting period and to ensure that the trade receivables has not been missed from the recording in the reporting period for which actually it pertains to. We should perform both pre year end and post year end cut off testing. For performing these procedures we generally perform the pre and post year end cut off procedures on 15 days or 1 month post and pre year end sales invoice listing depending upon the risk associated with the trade receivables account. We determine the number of samples need to be tested and obtain the invoices and verify that trade receivables associated with these invoices are recorded in the correct reporting period. We may also verify the subsequent cash receipt for these samples.
4) Verification of provision for impairment of trade receivables (Allowance for doubtful receivables account):- We should obtain the aged trade receivables listing from the management and the expected credit loss (ECL) policy of the entity. We may recalculate the provision for impairment of trade receivables to ensure that the provision calculated by the management is reasonable.
5) Analytical review of the trade receivable balances:- We may perform the analytical review of the movement of the trade receivable balances as compared to comparative year trade receivable balances. We may analyse the movement of balance on the basis of the movement of sales, cash receipt and provision for receivables. In case we identified unreasonable movement we may inquire the management for the reason of the unusual movement in the account.
Presentation and Disclosure required for the trade receivables as per the Schedule III of the Companies Act 2013
1) For current trade receivables: – There is separate line items on the face of the Balance Sheet under the head current asset.
2) For non-current trade receivables:- There is no separate line items on the face of the Balance Sheet for non-current trade receivables. We should disclose the non-current trade receivables under the head “Other non-current assets”.
3) In notes of the financial statements, we have to disclose the followings for both current and non-current trade receivables:
i) Trade receivables shall be sub-classified as:
a) Secured, considered good
b)Unsecured, considered good
ii) Trade receivables ageing schedule. There is specific format provided in Companies Act, 2013 through amendment w.e.f 1st day of April 2021:-
|Particulars||Outstanding for following periods from due date of payment|
|Less than 6 months||6 months – 1 year||1 – 2 Years||2 – 3 Years||More than 3 years||Total|
|(i) Undisputed trade receivables – Considered good|
|(ii)Undisputed trade receivables – Considered doubtful|
|(iii)Disputed trade receivables – Considered good|
|(iv)Disputed trade receivables – Considered doubtful|
Note: – Incase no specific due date is mentioned/agreed, in that case disclosure shall be from the date of transaction.
Unbilled dues shall be disclosed separately
iii) Allowance for the bad and doubtful debts shall be disclosed under the relevant head separately.
iv) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.