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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

While auditing Kaveri Textiles Ltd for the year ended 31 March, the auditor notes that the company has a large number of retail debtors with small balances. The auditor wants to obtain audit evidence about the existence of trade receivables. Which procedure is most appropriate for obtaining evidence directly from third parties on the existence of these balances?

Sending external confirmation requests to selected debtors is the most appropriate procedure. It obtains evidence directly from independent third parties about the existence of receivables, which is more reliable than internally generated records, recalculations or oral representations from the company's own sales staff.

  1. ARe-computing the ageing schedule prepared by the accounts department
  2. BExternal confirmation requests sent to selected debtorsCorrect
  3. CInspecting the sales ledger for arithmetical accuracy
  4. DEnquiring from the sales manager about collection prospects

Explanation

External confirmation (SA 505) gives evidence obtained directly from third parties and is a primary procedure for the existence of receivables. Re-computing the ageing and checking ledger arithmetic test internal records only, and management enquiry is the weakest form of evidence.

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