Question:
Sherwood Textiles manufactures knitted cloths and dyes these clothes and other textiles. You are carrying out the audit of the accounts of the company for the year ended 31st March which shows a turnover of about $10 million, a profit before tax of about $800,000.
You are attending the final audit in June and are commencing the audit of trade receivables, which are shown in the draft accounts at $2,060,000.
The interim audit (i.e. control testing) was carried out in February and it showed that there was a good system of internal control in the sales system, as no serious errors were found in the control tests.
The company's sales ledger is maintained on a computer, which produces at the end of each month:
1. A list of transactions for the month
2. An aged list of balances, and
3. Statements
REQUIRED
a) List and briefly describe the audit tests you would carry out to verify trade receivables at the year end - you are not required to describe how would carry out a receivables' circularisation
b) Explain the difference between positive and negative circularisation
c) Describe the audit work you would carry out on the following replies to a positive receivables'circularisation:
i. Balance agreed by receivables
ii. Balance not agreed by receivables
iii. Receivables does not reply to the circularisation