Auditing and Ethics · Audit of Items of Financial Statements

Audit of Trade Receivables, Loans and Cash

Updated 4 October 2026 · Fact-checked

Audit of trade receivables, loans and cash means gathering evidence on existence, rights, valuation and presentation of these balances. You confirm debtors directly, test cut-off and recoverability, check loan documents and approvals, and verify cash by physical count and bank balances by confirmation and reconciliation.

Understand Audit of Trade Receivables, Loans and Cash

These three areas sit on the balance sheet as current assets. The auditor must be satisfied that the balances exist, belong to the entity, are fully recorded, are valued correctly (after allowing for doubtful amounts), and are properly presented and disclosed.

Trade receivables (debtors) arise from sales on credit. The main risks are fictitious or overstated sales, wrong cut-off, and balances that will never be collected. Under SA 240 there is a presumed fraud risk in revenue recognition, so debtors work links closely to the audit of sales. The best evidence is external: a direct confirmation from the debtor under SA 505. Where a reply is not received to a positive confirmation request, the auditor performs alternative procedures such as checking subsequent receipts, dispatch records and invoices (SA 505). A negative confirmation works differently: the debtor replies only if they disagree, so silence is not treated as a non-response that needs follow-up in the same way, and it is not proof that the balance is agreed.

Loans and advances include loans to employees, related parties, other companies, advances to suppliers and deposits. The auditor checks authority (board or shareholder approval where the Companies Act requires it), documents, terms, interest, security, and whether the amount is recoverable. Loans to directors and related parties need special care for compliance and disclosure.

Cash and bank balances are easy to misappropriate, so controls matter. Cash in hand is verified by a physical count, ideally surprise and simultaneous across locations, and reconciled to the cash book as at the balance sheet date. Bank balances are verified through a bank confirmation, the bank statement and the bank reconciliation statement (BRS). Items in the BRS such as cheques issued but not presented, and cheques deposited but not credited, are traced to later bank statements.

Key rules to remember

Bank reconciliation: adjusted bank balance and adjusted cash book: Adjusted bank balance = Bank statement balance + Cheques deposited not yet credited − Cheques issued not yet presented ± Bank errors. Adjusted cash book = Cash book balance ± Direct entries not yet recorded in the cash book; Bank-side items adjust the bank statement balance. Book-side items (direct credits, charges, interest) adjust the cash book. After all adjustments the two should agree. Use only as a reconciliation check, and adjust signs correctly when the balance is an overdraft.
Net trade receivables: Net receivables = Gross receivables − Provision for doubtful debts (or expected credit loss under Ind AS 109 where applicable); Auditor tests whether the provision is reasonable and based on ageing and subsequent receipts.
Positive vs negative confirmation: Positive: the debtor is asked to reply directly to the auditor stating whether they agree with the balance or to provide the information requested. Negative: the debtor replies only if they disagree; Negative confirmations alone are not sufficient appropriate evidence for a risk that is assessed as significant.
Cash count reconciliation: If the count is after the balance sheet date: Cash at balance sheet date = Cash counted + payments made after the balance sheet date − receipts after the balance sheet date. If the count is before the balance sheet date, reverse the adjustment: Cash at balance sheet date = Cash counted + receipts − payments between the count date and the balance sheet date; Used when the count is not on the balance sheet date. Agree the resulting figure to the cash book balance at the balance sheet date.

How to solve Audit of Trade Receivables, Loans and Cash questions

Use the same logic for any question on these balances: identify the assertion at risk, then match a procedure to it.

1Identify the item (debtors, loans, cash or bank) and the key assertions at risk: existence, rights, completeness, valuation, cut-off, presentation.
2Review internal controls: credit approval, segregation of duties, authorisation of loans, cash handling and bank reconciliation by someone other than the cashier.
3List the procedures: confirmation, inspection of documents, physical count, reconciliation, subsequent receipts, analytical review.
4Explain each procedure with its purpose, not just its name.
5For non-replies or differences, state the alternative procedures and how you resolve differences.
6Cover valuation: ageing, provision, recoverability, security, and related-party loans.
7Check presentation and disclosure under Schedule III and applicable AS, such as ageing schedules and related-party loans.
8Conclude on whether sufficient appropriate evidence is obtained and whether any modification or reporting is needed.

Quickest way: Assertion-procedure pairing

When to use it: Use in MCQs and in 5 to 6 mark written answers when time is short.

For MCQs, remember: existence of debtors = confirmation; completeness of cash = controls over receipts; valuation = ageing and subsequent receipts; cash in hand = surprise count.
Eliminate options that rely only on internal evidence when external evidence (confirmation) is available.
Write answers as short bullets: Procedure, then purpose, one line each.
Use fixed headings: Debtors, Loans and advances, Cash in hand, Bank balances.
Always add the alternative procedure for non-response, since this earns an easy mark.

Common mistakes in Audit of Trade Receivables, Loans and Cash

Treating a debtor confirmation as proof that the balance is recoverable.
Students link confirmation with all assertions.
Fix: Confirmation mainly supports existence. Recoverability needs ageing, subsequent receipts and the debtor's financial position.
Stopping when a debtor does not reply.
Students forget SA 505 requires alternative procedures.
Fix: Test subsequent receipts, dispatch documents, invoices and customer orders.
Relying on the BRS prepared by the client without testing.
It looks like complete evidence.
Fix: Agree to the bank statement and confirmation, and trace reconciling items to the next statement and to the cash book.
Ignoring cut-off for cash and debtors.
Focus stays on the balance, not the period.
Fix: Check receipts and sales around the year end, including goods dispatched and cheques recorded after the year end.
Forgetting compliance checks for loans to directors or related parties.
Students treat loans as only a vouching task.
Fix: Check approvals, interest terms, related-party disclosure and Companies Act restrictions, and report where required.

Worked examples

Example 1

A positive confirmation request was sent for a customer with a balance of ₹8,40,000. No reply was received. Explain what the auditor should do.

Show the solution

Recognise that non-response means the confirmation evidence is not obtained.
Perform alternative procedures to establish existence and valuation.
Examine subsequent receipts: check cash or bank receipts after the year end against that customer.
Inspect invoices, goods dispatch notes, delivery proof and customer orders for the unpaid sales.
Check whether sales near the year end were recorded in the correct period.
If evidence still cannot be obtained, consider the effect on the audit opinion and assess whether a provision is needed.

Answer: The auditor should send a follow-up request if appropriate and then perform alternative procedures such as testing subsequent receipts and supporting sales documents. If sufficient evidence is still not obtained, the auditor considers the implications for the opinion.

Example 2

At 31 March, the cash book shows a bank balance of ₹5,20,000. The bank statement shows ₹5,60,000. Cheques issued but not presented total ₹70,000. Cheques deposited but not yet credited total ₹30,000. Verify whether the BRS reconciles.

Show the solution

Start with the bank statement balance: ₹5,60,000.
Add cheques deposited but not credited: ₹5,60,000 + ₹30,000 = ₹5,90,000.
Deduct cheques issued but not presented: ₹5,90,000 − ₹70,000 = ₹5,20,000.
Compare with the cash book balance of ₹5,20,000. They agree.
Trace the uncleared cheques to the April bank statement and check their dates and amounts.

Answer: The BRS reconciles, since the adjusted bank balance of ₹5,20,000 equals the cash book balance. The auditor should still verify the reconciling items through later bank statements.

Exam tips

Always mention SA 505 for external confirmations and state both positive and negative types.
In cash questions, state that the count should be surprise and done in the presence of the custodian, with a signed acknowledgement.
For BRS questions, show the arithmetic clearly. Step marks are given even if one number is wrong.
Use the answer pattern: control check, procedure, purpose, then conclusion.
In MCQs, watch for the words existence versus valuation, as the correct procedure differs.

Practice questions from Audit of Items of Financial Statements

Audit of Trade Receivables, Loans and Cash in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Trade Receivables, Loans and Cash: frequently asked questions

What is the best audit evidence for trade receivables?

A direct confirmation from the debtor is the strongest evidence of existence because it comes from an external party. It does not prove the debt is recoverable. For that, the auditor reviews ageing and subsequent receipts.

What if the client asks the auditor not to send confirmations?

The auditor asks why and seeks evidence on whether the reasons are valid and appropriate. If the refusal is reasonable, the auditor performs alternative procedures to obtain relevant and reliable evidence. If the refusal is unreasonable, the auditor communicates with those charged with governance and considers the implications for the audit and the opinion, while also performing alternative procedures where possible. If alternative procedures do not give sufficient appropriate evidence, the auditor likewise communicates with those charged with governance and considers the effect on the opinion.

How is cash in hand verified?

The auditor, preferably by surprise, counts cash in the custodian's presence and reconciles it with the cash book. If the count is on another date, the auditor adjusts for transactions between the count date and the balance sheet date.

Why is a bank confirmation needed when there is a bank statement?

A bank confirmation comes directly from the bank and covers balances, loans, securities and other arrangements. It gives more reliable evidence than the client's copy of the statement.