Sunshine Electronics Limited manufactures and sells consumer electronic products on credit to dealers across the country. During the statutory audit…

Trade receivables are an essential part of any organisation's balance sheet, often referred to as debtors. Typically, an invoice is raised and issued to the customer with the invoice amount being recorded as a debtor balance. Until the invoice is paid, the invoice amount is recorded in the organization's balance sheet as accounts receivable. If these balances are not recoverable later on, then these amounts need to be written off as bad and charged in the statement of profit and loss. It is important to carry out Test of Controls for checking the effectiveness of internal control over sales as a part of the debtors' audit procedure. Following points need to be considered in respect of trade receivables: Only bona fide sales lead to trade receivables. All such sales are made to approved customers. All such sales are properly recorded in the books of accounts. Once recorded, the debtors can be settled only by receipt of cash or on the authority of a responsible official. Segregation of duties at every point in sales transaction. (accounting for debtors, collecting the payments, sending reminders etc.) Debtors are collected on time. In case debtors are not collected in time, sending reminders and taking legal actions if required. Balances are regularly reviewed. A proper system of follow up exists and if necessary, adequate provision for bad debt should be made by preparing adequate ageing schedule of the debtors. In the given facts, the auditor should evaluate whether the internal controls over trade receivables are designed and operating effectively. An effective system of controls helps ensure that receivables arise only from genuine sales, are recovered on time, and are appropriately monitored and provided for, thereby reducing the risk of material misstatement in the financial statements.