Assessing Receivables Recoverability in an Audit

An ageing tells you where to look, not what’s wrong

A worked case: total owed is ₹12.5 crore, most under a year old — but ₹2.4 crore is over 365 days old with no payment at all. The ageing itself doesn’t prove anything is wrong; it tells you exactly where to spend audit time. An old, unpaid balance sitting with the largest customer is precisely where a valuation problem would live.

Sorting evidence: for, against, or not evidence at all

No payment for over twelve months — undermines recovery; a year of silence is the strongest single fact available. The customer has never formally defaulted on other invoices — supports recovery, but only weakly, since it’s about different invoices. A reply disputing the amount and referencing returned goods — undermines recovery; it’s evidence from outside the client saying the debt isn’t even accepted. Management’s expectation that it’ll resolve next quarter — not evidence at all. It’s an expectation, not a document.

Weighing this evidence: more provision is warranted than the existing one, not because the whole balance is lost, but because the provision needs to reflect what the evidence actually supports, not what management hopes.

Two kinds of provision

• —Specific provision — against a named debt, once a particular customer’s balance has been identified as doubtful.
• —General provision — a percentage applied to a pool of remaining balances, based on historical bad-debt experience. The two work together: take specific items out first, then apply the general rate to what’s left.

Framing an estimate as a range

An estimate is rarely a single defensible number — it’s easier to defend as a range. Best case: the customer settles most of the dispute with some credit for returns, provision at the lower end. Central case: part of the goods were genuinely returned, part is still owed, nothing paid in a year — roughly half is a reasonable central estimate. Worst case: no payment ever arrives, provision close to full. The real audit question is where management’s own figure sits in that range, and whether there’s anything to support that specific position. A number parked at the optimistic end with nothing behind it is what bias looks like.

Not all subsequent cash is equal

A payment after year end against the old, disputed invoices is strong evidence — it reduces doubt for the amount paid. A payment against new, unrelated invoices gives little comfort for the old balance; the customer is just paying what it already accepts it owes. A part-payment accompanied by a “full and final settlement” letter actually supports a larger provision — it shows the customer’s own view of what it really owes. A promise to pay, with no cash behind it, is weak evidence on its own.

The question that keeps an estimate honest

Ask: what evidence would change my mind? If a payment of a certain size would make the provision drop, that should be stated explicitly. If nothing would change the conclusion, that’s not weighing evidence anymore — it’s defending a position. The same question applies to management: if the CFO can name evidence that would change her view, go look for it. If she can’t, that itself says something about how the number was actually reached.

When management resists for the wrong reason

If management won’t book more provision because it would hurt the year’s profit target, that response reveals incentive — a profit target is exactly the kind of pressure that creates bias. The right response: record the difference as unadjusted, document the evidence, and report it to those charged with governance. The accounts are management’s to adjust or not — but the board should know regardless.

One estimate leaning favourably isn’t automatically a problem. But if every estimate management makes leans the same direction — always more favourable to profit — that’s not a coincidence of independent judgment calls. It’s a pattern, and that pattern is what bias actually looks like across a full set of accounts.

Mistakes that undermine a recoverability assessment

• —Accepting management’s confidence as if it were evidence of recoverability.
• —Comparing this year’s provision to last year’s instead of to the actual evidence.
• —Ignoring the direction of estimate differences across the whole set of accounts.
• —Not recording an unadjusted difference just because management disagrees with it.