You are the auditor of A Ltd, a company in the building industry.
In your planning for the audit, you discover that the building industry is experiencing a significant decline which increases the risk of misstated material account balances such as bad debts. You discover that the credit manager of the company reviews regularly the record of aged trade debtors. You find that the review of the aged debtors is the only internal control procedure applied on trade receivables.
Required:
(a) State the tests of controls to evaluate the effectiveness of the internal control on trade receivables
(b) Suggest three additional internal control procedures to be applied by the company on trade debtors
(c) State the substantive procedures on trade debtors if the tests of controls in (a) show that controls are effective.
(d) You find that the credit manager fails to check the record of aged trade debtors regularly. State how this will affect the nature, timing and extent of your substantive procedures.
(Source: Case Studies in Auditing and Assurance, Roebuck, P., 4th ed., Lexis Nexis Butterworths)