You are a senior member of the audit team at Grain Millers Ltd., a company whose business is milling maize, wheat and other products for local consumption. The annual turnover for the year ended 30 September 2002 amounted to Sh. 1.5 million and most of its sales were on credit.The audit team leader has assigned you the audit of the provision for bad and doubtful debts which has been set at Sh. 4.75 million; out of which Kshs 3.25 million relates to the provision against specific bad and doubtful debts and the balance of Sh. 1.5 million is a general provision determined as a percentage of overdue debtors with a higher percentage being applied against the longest overdue accounts. Required: Outline the audit procedure you would apply in verifying the general provision for bad and doubtful debts and Explain how you would verify the specific provision for bad and doubtful debts

  • Procedures for verifying
    General provision for bad and doubtful debts
    The question is very specific and requires you to detail the procedures you would carry out in verifying the general provisions.
  •  To verify that the bases applied in computing the general provision is reasonable;
  •  To verify that the general provision is accurately computed;
  •  To verify that the provision created is adequate.
    a) Obtain an understanding of the basis applied by the company in computing the general provision for bad debts. From your knowledge of the company and experience evaluate whether the basis chosen is appropriate. In particular, ensure that more provisions are created for long overdue accounts.
    b) Compute the ratio of general provisions to debtors and compare this with the previous period. Obtain explanations for any significant movements.

c) Using the method applied by the company and the debtors‘ balances recompute the expected provision and compare the amount with what is provided for by the company.
d) Compare the prior years general provision with the actual debts that were written off during the current year as a check for the reasonability of the method applied by the company.
e) Obtain representations from management that the provisions created are adequate.

Verifying the specific provision
a) Obtain a schedule of the debtors‘ accounts against which specific provisions were created.
b) Obtain the reasons why these accounts were considered bad and verify whether the specific provision is adequate (whether this is below 100%)
c) Verify that all accounts that are considered bad, e.g. disputed balances are fully provided for.

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