PQR & Associates, Chartered Accountants, have been appointed as the statutory auditors of Star Electronics Limited. During the planning stage,…

PQR & Associates, Chartered Accountants, have been appointed as the statutory auditors of Star Electronics Limited. During the planning stage, the engagement team identified trade receivables as a significant audit area due to rapid expansion of the company's dealer network during the year. Accordingly, the auditor performed analytical procedures by comparing the current year's debtor turnover ratio, ageing analysis, gross profit percentage and credit sales with those of previous years and industry averages. The analytical procedures revealed that while credit sales had increased by only 12%, trade receivables had increased by 48%. The proportion of receivables outstanding for more than 180 days had also increased significantly compared to the previous year. On being questioned, the Finance Director explained that the increase was temporary because several customers were expected to clear their outstanding balances shortly after the year-end. However, the engagement team observed that some long-outstanding balances related to customers whose credit limits had been repeatedly extended during the year. The auditor, therefore, decided to obtain additional audit evidence by examining subsequent collections, reviewing correspondence with customers and evaluating the adequacy of the provision for doubtful debts. While evaluating internal controls over trade receivables, the auditor noted that new dealers were approved by the Credit Control Department before sales were made. Sales invoices were generated automatically through the ERP system, collections were handled by a separate Finance Department, and periodic ageing reports were reviewed by senior management. However, the auditor also observed that follow-up of overdue balances was inconsistent in certain regional offices and legal notices had not been issued in several long-pending cases. Throughout the engagement, the audit team maintained detailed working papers recording the planning discussions, significant audit judgements, analytical procedures performed, audit evidence obtained, conclusions reached and the basis for additional audit procedures performed in respect of trade receivables. Audit team considers that an important factor in determining the form, content and extent of audit documentation of significant matters is the extent of professional judgement exercised in performing the work and evaluating the results. After the financial statements for the year ended 31 March 2026 had been prepared but before the auditor signed the audit report, one of the company's largest customers, Rajat Industries, owing approximately ₹18 crore, was declared insolvent by the National Company Law Tribunal (NCLT). The customer had been facing severe financial difficulties even before the year-end, and a substantial portion of its dues had remained outstanding for more than eight months as at 31st March 2026.