Audit

This document provides information on allowance for doubtful debts and related party disclosures in the context of an audit. It explains the concept of allowance for doubtful debts and its impact on financial statements. It also discusses the objective and requirements of related party disclosures as per AASB 124.

Running head: AUDIT
Audit
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Table of Contents
Answer 1....................................................................................................................................2
Answer 6....................................................................................................................................3
Reference....................................................................................................................................5

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Answer 1
Allowance for doubtful debts is reduction of total amount of the accounts receivable
shown under the balance sheet and is immediately deducted from the amount of accounts
receivable. Allowance for the doubtful debts accounts represent the best estimate of
management on amount of the account receivable that is unrecoverable from the customers. It
is not necessary that it reflects the actual experience that may differ remarkably from the
expectation. However, if the actual experience varies the management shall make the
required adjustments for bringing the reserve more into the alignment with the actual results.
Bad debt can be written off though using the direct write off approach or through provision
method (Sigidov et al. 2016). Allowance for the bad debt is the valuation used for estimating
portion of the receivable that is uncollectible. As per the allowance method the organisation
shall pass adjusting entry at the end of each accounting period for loss amount that is
anticipated by it for the period of credit allowed to the customers. The adjustment increases
the amount of loss and it is a debit to the operating expenses account for bad debt expenses
and credit to contra asset. Entry for writing off particular uncollectible account will need
debit to the allowance for the doubtful account and credit to the accounts receivable. For
instance, if credit sale is for $ 80000, the entity will report $ 2400 as bad debt expense and
credit allowance for doubtful debt for same amount. It will lead to charging the expense in
the income statement as bad debt (Kieso, Weygandt and Warfield 2016) However, if the
company is not able to collect any amount till the year end the balance sheet will report $
80,000 as receivable and $ 2400 credit balance as allowance for doubtful debts. When it is
established that the amount will not be receivable $ 2400 will be write off from allowance
and the same amount will be deducted from receivables. Hence, inadequate write off of
allowance for doubtful debts will inflate the receivables that will misstate the financial

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position. For example, the liquidity position will be shown as stronger as receivables will be
reported at higher amounts. As the amount is material and the management is not ready to
make the necessary changes, the auditor will issue modified opinion (Weygandt, Kimmel and
Kieso 2015)
Answer 6
Main objective of related party disclosures as per AASB 124 is assuring that the
financial statement of any entity includes the necessary disclosures for drawing attention to
the likelihood that the financial position and the profit and loss may have been impacted by
existence of related parties and by the outstanding balances, transactions and commitments
with such parties. AASB 124 requires the entities to disclose details regarding related party
transactions, relationships, commitments and outstanding balances under separate and
consolidated financial statements of the patent or the investors with the joint control of or the
significant influence over the investee presented incompliance with AASB 10 that is
consolidated financial statement or AASB 127 that is Separate financial statements
(Aasb.gov.au 2019). Further, the related party transactions as well as outstanding balances
with the other organisations in the group are disclosed in the financial statement of the entity.
Further, the transactions for intra-group related party as well as the outstanding balances are
removed, except for those among the investment company the subsidiaries measured at the
fair values through the profit or loss while consolidated financial reports of the company are
prepared. Related party disclosures have impact on the profit and loss and the financial
position of the company (Aasb.gov.au 2019). Mere existence of relationship is sufficient to
impact the transactions of entity with the other parties. For instances, the subsidiary may
terminate the relations with the trading partner upon acquisition by parent of fellow
subsidiary that is engaged in same activity as former trading partner. Conversely, one party

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may be abstained from acting as it may have noteworthy influence of another (Downs et al.
2016). Owing to these, knowledge of the entity’s transaction including commitments,
outstanding balances and the relationship with the related parties may have an impact on the
assessment of the operation by the users of the financial statements. It includes assessment of
opportunity as well as risks faced by the company. Relationship among parent and its
subsidiary must be disclosed irrespective of the fact that whether any transaction taken place
between them or not. The organisation shall further disclose name of the parent and name of
ultimate controlling party, if different. If neither of parent or ultimate controlling party
delivers consolidated financial statement for the public use, name of most senior parent shall
also be disclosed (Ijeoma and Aronu 2015).

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Reference
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB124_07-15.pdf [Accessed 17 May
2019].
Downs, D.H., Ooi, J.T., Wong, W.C. and Ong, S.E., 2016. Related party transactions and
firm value: evidence from property markets in Hong Kong, Malaysia and Singapore. The
Journal of Real Estate Finance and Economics, 52(4), pp.408-427.
Ijeoma, N. and Aronu, C.O., 2015. The contribution of creative accounting on economic
development. International Journal of Scientific & Engineering Research, 4(9), pp.2499-
2502.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.
Sigidov, Y.I., Korovina, M.A., Trubilin, A.I., Govdya, V.V. and Vasilieva, N.K., 2016.
Creation of provision for doubtful debts. International Journal of Economics and Financial
Issues, 6(4).
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.