Accounts Receivable Verification And Allowance For Doubtful Accounts | Solens Corporation Year-end

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Written confirmation is an effective process used by the auditors of an organization to confirm the authenticity of certain account balances stated in the books of accounts of the organization. Generally direct confirmations are requested from customers and suppliers of an organization to verify the authenticity of accounts balances in the Balance sheet of the organization as on a particular date.

Maintaining proper working papers in respect of aged accounts receivable balances is important for auditing of financial statements of an organization. Written conformations received from customers and suppliers are used to assess the truth and fairness of the accounts receivable balances showed in the Balance sheet of an organization. In this case the accounts receivable balances of Sorens Corporations are subjected to the standard auditing process. The direct confirmations has been asked from high valued customers and few other customers selected on the random basis. Taking into consideration the replies of the customers the following assertions have been made in respect of accounts receivable balances of the company as on December 31, 2018 (Andiola, Lambert and Lynch, 2018).

Aged Trial Balance of Individual customers of Solens Corporation is produced below:

Solens Corporation
Aged Trial Balance Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
As at December 31, 2018
	0-30 days	31-60 days	61-90 days	90+ days	Total
Antares Solar	3,760.79	27,196.25	24,329.01	2,627.45	57,913.50
Betelgeuse Building and Renovations	30,623.09	57,112.37	3,474.89	6,836.39	98,046.74
Canopus Roofing	28,899.64	28,046.67	14,020.91	–	70,967.22
Deneb Energy	68,820.05	34,159.88	(16,435.91)	–	86,544.02
Epsilon Contractors	90,439.55	79,249.66	29,118.96	2,465.15	201,273.32
Fomalhaut Roofing and Siding	60,026.89	90,752.54	(22,836.83)	–	127,942.60
Gacrux General Contractors	30,317.51	32,389.00	3,019.41	7,621.23	73,347.15
Hadar Solar	23,227.17	39,517.08	86,479.64	208.87	149,432.76
Izar Green Building	51,700.42	58,488.02	7,814.71	11,895.82	129,898.97
Jabbah Hut and Hatch	2,663.58	14,975.15	26,577.24	2,302.59	46,518.56
Kocab Renovations	30,144.43	110,953.03	101,551.44	–	242,648.90
Lesath Roofing	4,666.74	78,197.64	47,284.93	–	130,149.31
Mankar Home Services	90,654.54	194,562.95	1,911.14	2,761.71	289,890.34
Nodus Secondus and Sons	10,414.56	57,180.12	2,723.44	1,104.44	71,422.56
Omega Services	58,537.87	72,904.60	34,702.97	–	166,145.44
Pollux and Associates Building	16,737.33	146,870.78	1,141.20	1,680.25	166,429.56
Quark Energy	389.69	51,305.28	–	3,829.45	55,524.42
Rigel Roofing	8,139.05	173,647.59	5,318.24	–	187,104.88
Sirius Home Services	33,586.24	108,094.43	943.05	3,802.49	146,426.21
Tarazed New Products	11,917.12	64,587.66	10,624.20	–	87,128.98
Unukalhai All in One Contractors	63,393.92	112,429.74	5,009.55	–	180,833.21
Vega Contractors	30,731.36	36,374.51	28,653.36	–	95,759.23
Wasat Roofing	21,267.97	61,602.68	–	(708.62)	82,162.03
X-Ray Quasar Energy Company	29,896.40	128,177.60	4,346.24	1,531.30	163,951.54
Yed Prior and Sons	33,015.76	100,611.94	6,576.54	–	140,204.24
Zaurak Building and Renovatioin	81,747.16	200,999.09	7,325.98	3,362.08	293,434.31
	915,718.83	2,160,386.26	413,674.31	51,320.60	3,541,100.00
Less: Allowance for doubtful accounts					103,000.00
Net Accounts Receivable					3,438,100.00

The accounts receivable ledger is produced below:

	Balance		Adjusted
	Per G/L	Adjustments	Balance	2017
Trade Accounts Receivable	$ 3,541,100		$ 3,541,100	$ 1,683,848
Allowance for Doubtful Accounts	(103,000)		(103,000)	(45,000)
Net Accounts Receivable	$ 3,438,100	$ –	$ 3,438,100	$ 1,638,848

As can be seen that the individual customers’ balance total is exactly similar to the aggregate amount of individual customers’ accounts as per the Aged Trial Balance of the company. Thus, there is arithmetic accuracy to the above figures in both general ledger for accounts receivable as well as in maintenance of individual customers’ accounts in Aged Trial Balance.

Confirmation Summary
	W/P Ref	Amount	% of Confirmation	% of total Receivables
Total of high value accounts		$ 1,027,247	79%	29%
Total of random selection		$ 273,138	21%	8%
Total circulation		$ 1,300,385		37%
Net differences noted in sample		$ 104,031	8%
Adjusted circulation total		$ 1,196,354
Gross receivables per books		$ 3,541,100
Less: adjustment per sampling results		$ 283,288
Adjusted gross total of trade accounts receivable		$ 3,257,812

Out of the total circulation of $1,300,385 sent to the high value and 5 random customers of the company a net difference of $104,031 has been discovered from the reply to the confirmation requests. In this regard it is also to be noted that in those case where no replies from the customers have been received it has been assumed that the customers are in agreement with the balances provided in the confirmation request. Despite that the difference of 8% in total circulation amount is a significant difference.

The customer wise segregation along with timing and real differences between the amount of circulation and amount of confirmation are listed in the table below.

	Amount Circulated	Amount Confirmed	Timing Differences	Real differences	Percent of Confirmation
Select 3 highest accounts		–	–
Kocab Renovations	242648.9	242648.9
Mankar Home Services	289890.34	258772.34		31,118
Zaurak Building and Renovatioin	293434.31	273441.13		19,993
Total of high value accounts	825,974	774,862	–	51,111	63.5%
Select 5 accounts at random
Antares Solar	57913.5	30957.04	26,956
Epsilon Contractors	201273.32	201273.32
Deneb Energy	86,544.02	60,580.81		25,963
Jabbah Hut and Hatch	46,518.56	46,518.56
Wasat Roofing	82,162.03	82,162.03
Total of random selection	474,411	421,492	26,956	25,963	36.5%
Total	1,300,385	1,196,354	26,956	77,074	100.0%

Timing difference between the amount of circulation and amount of confirmation is a natural phenomenon and is not a matter of concern. However, there is significant real difference between the conformation and circulation. This definitely shows there is security and control weaknesses within the system of the company. The amount of real difference in 3 highest value customers’ accounts is $51,111 as can be seen in the above table shows there is significant weakness in the internal system and control in respect of collection and recording of accounts receivable in the books of accounts. Out of the 5 random accounts selected an amount of $25,963 is the real difference with $26,956 as the timing difference.

As already mentioned that timing difference is a natural phenomenon thus, not a matter of concern however, the real difference between the amounts showed as receivable and amount confirmed by the customer is a huge a cause of concern. The company must take necessary steps immediately to ensure that the accounts receivable is correctly recorded in the books of accounts and there is a standard system to collect the accounts receivable without any risk of fraud (Engle and Hunton, 2015).

In respect of those customers from whom no replies have been received in respect of written conformation confirming their accounts balances, the auditor should check the records in respect of sales made to these customers along with the duplicate copy of invoices sent to them. A detailed checking on the payments received from these parties shall also be conducted to ensure that all payments received from them have been correctly entered into the books of accounts of the company. All findings shall be properly documented in the books of accounts for future references.

Following are the adjustment entries to be made to adjust the accounts receivable balance of the company:

Accounts Receivable – Adjusting Journal Entries
Account titles and explanation	Debit ($)	Credit ($)
Bank	52,919.67
Accounts receivable		52,919.67
(Being cheque sent and payment made wrongly not entered)
Sales	51,111
Accounts receivable		51,111
(Being volume discount and excesses sales adjusted)

The net accounts receivable balance subsequent to the above adjustments is as following:

Trade Accounts Receivable
Net accounts receivable balance as per books of accounts	3,438,100.00
Less: Adjustments	104,030.85
Net accounts receivable balance	3,334,069.15

References:

Andiola, L.M., Lambert, T.A. and Lynch, E.J., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation, and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp.43-55. Avilable at: https://www.aaajournals.org/doi/abs/10.2308/iace-52055 [Accessed on 2 December 2018]

Engle, T.J. and Hunton, J.E., 2015. Retraction: The Effects of Small Monetary Incentives on Response Quality and Rates in the Positive Confirmation of Account Receivable Balances. AUDITING: A Journal of Practice & Theory, 34(3), pp.201-201.

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