Assume you are working on a 12/31 year-end audit. It is now March 31^st and the 12/31 accounts receivable aging shows a large receivable that was outstanding on 12/31 for 120 days. Further, the client's receivables are typically collected in less than 45. You anticipate that the client's allowance for doubtful account should be increased and inform the client about your disposition. The client disagrees. Is there an alternative substantive procedure that you could perform that would provide convincing evidence that this balance is collectible? If so, explain.

 

Debtors are outstanding for more than 120 days as of December 31 The debtors are outstanding for more than 150 days as of March 31 where in fact the average collection period is only 45 days.

As a result, the provision for doubtful debts should be increased.

Step-by-step explanation

If client is disagrees, the following alternative substantive procedure can be performed:

1. The auditor can make an independent confirmation to the debtors regarding their balances as of December 31. As a result of confirmation, if the debtor's reply matches with the client's books, then the auditor can be satisfied that the amount due from debtors shall be collected and it shall not be considered as bad debt.

2. If there is a difference between these amounts, the auditor should ask the reasons and evaluate if it is justifiable. If it is not justifiable, provision should be made while provision should not be made if it is judged as justifiable.