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TEST YOUR UNDERSTANDING 1
a) Describe the steps an auditor should take when conducting a trade receivables confirmation
(circularisation) test.
(4
marks)
b) Explain why a direct confirmation test may not provide sufficient appropriate audit evidence on its own.
(3 marks)
You are the audit manager in charge of the audit of Builders Mate, a limited liability company. The company’s year
end is 31 March, and Builders Mate has been an audit client for three years. Builders Mate sells small tools, plant
and equipment exclusively to the building trade. They have 12 warehouse style shops located throughout the
country. Builders Mate does not manufacture any products themselves.
The audit fieldwork is due to commence in 3 weeks time and you are preparing the audit work programme for the
trade receivables section of the audit. Extracts from the clients trial balance show the following information.
$
Trade receivables control account
124,500
General trade receivables allowance
(2,490)
Specific trade receivables allowance
0
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From your review of last year’s audit file you have determined that last year there were 2 specific allowances of
$5k and $2k as well as a 3% general allowance.
Initial conversations with the client indicate that there are no specific allowances that are to be made this year
however they intend to reduce the general allowance from 3% to 2%.
You are aware that two of Builders Mate’s major customers went into administration during the year and they are
likely to be liquidated in the near future. Both of these customers owed material amounts at the yearend.
Required:
c) Describe substantive procedures the auditor should perform on the yearend trade receivables of
Builders Mate.
(9 marks)
(Total: 20 marks)