A representative sample should be selected from the debtors listing. When selecting the sample the following classes of accounts should receive special attention:

  1. All large debtors would be circularised i.e. debtors above the materiality level set for debtors.
  2. Credit balances would also be selected to try to confirm that they are genuine credit balances. This is because debtors system should produce debit balances not credit balances.
  3. Debtors who seem to have exceeded their credit limits in terms of amounts or time may also be selected.
  4. Small or nil balances on accounts that are normally very active during the year would be selected to confirm that there is no window dressing.
  5. Newly opened accounts also tend to be circularised. The remaining accounts tend to be selected on a random basis.
  6. Long outstanding balances. This helps in assessing the need to create a provision for irrecoverable balances.
  7. Accounts in dispute.

Alternative tests

Where it proves difficult to get confirmations from individual debtors the following alternative procedures can be applied:

  1. Review of the after-date payments: because if the debtor has subsequently paid then there is evidence that the debtor was in existence.
  2. Review of supporting evidence for the invoices that make up the balance. These include: Customer orders and acknowledgement or receipting of the goods.
  3. Sometimes the correspondence with the customer is also reviewed.

Cut off procedures

Cut off procedures are tests performed to ascertain whether the company’s transactions are recorded in the financial period to which they relate. If transactions are recorded in the wrong financial period account balances could be over/under stated. E.g. where there is a time lag between the dispatching of goods and the recording of these dispatches as sales, such sales may be recorded as sales in the wrong period.

Cut-off tests with regards to debtors should be performed to ensure that debtors are recorded in the correct period.

The following tests can be performed;

  1. Take note of the last serial number of the goods dispatch note for the period under review.
  2. Verify that the sale was recorded in the current period
  3. Verify that such items sold were not included as part of closing stock

Teeming and lading in debtors

This is a fraud that can occur in debtors if the person in charge of posting entries to the debtors account has access to cash receipts. This can also occur by colluding with the cashiers. This fraud involves the concealment of cash received from debtors by delaying to record the receipts. The cash received is then misappropriated. The debtor could then be written off as a bad debt or money received from another debtor could be credited to such an account concealing the fraud.