How would you audit management’s expected credit loss provision on trade receivables?

What the interviewer wants to hear

• Understands the method and controls over the estimate
• Tests completeness and accuracy of the ageing data
• Challenges historical loss rates and forward-looking adjustments
• Develops an independent estimate or range
• Looks for management bias and reviews disclosures

Model answer

Under SA 540 I would first understand how management calculates the provision, usually a provision matrix under Ind AS 109 or IFRS 9, plus specific provisions, and what controls exist over it. I would test the data: check the ageing report is complete and that invoices sit in the right buckets by tracing samples to invoice dates. Then I would challenge assumptions: recompute historical loss rates, see whether forward-looking adjustments reflect current conditions in the customers’ industries, and look at collections after year end. I would do a retrospective review, comparing last year’s provision with what actually happened. For major customers in dispute or financial trouble, I would read correspondence and legal advice. Where useful I would build my own point estimate or range and compare. Finally, I would consider whether management’s choices consistently push the estimate in one direction, which could indicate bias, and check the disclosures of credit risk and judgements.

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