Key Points
- Accounts receivable represent unconditional rights to payment and appear on the balance sheet net of expected credit losses.
- External confirmations remain the primary audit procedure for existence and accuracy of trade receivable balances.
- Receivable balances overdue by more than 90 days typically make up 5% to 15% of the total AR balance on mid-market engagements.
- Understating the expected credit loss allowance is one of the most frequent adjustments identified during year-end audits.
What is Accounts Receivable?
An entity recognises a receivable when it has an unconditional right to consideration. IFRS 15.108 distinguishes receivables from contract assets: if the only condition remaining before payment is the passage of time, the balance is a receivable. If additional performance is still required, it is a contract asset.
On initial recognition, trade receivables are measured at the transaction price determined under IFRS 15.47. From that point forward, IFRS 9.5.5.15 requires application of the simplified approach to expected credit losses, meaning the entity must recognise lifetime expected credit losses from day one. No trigger event is needed. In practice, most entities build an ageing matrix that groups receivables by days past due and applies historical loss rates adjusted for forward-looking information. The resulting allowance hits the income statement as an impairment expense.
For the auditor, receivables testing centres on existence and valuation (with completeness as a secondary concern, since entities are less likely to omit assets). ISA 505.7 establishes external confirmations as a relevant procedure when the auditor identifies a risk of material misstatement at the assertion level. Positive confirmations sent directly to customers provide evidence for existence and accuracy. When confirmation response rates are low (common in southern European jurisdictions), alternative procedures under ISA 505.12 include tracing subsequent cash receipts, examining shipping documents, reviewing contractual terms, or matching to delivery records.
Worked example
Client: Spanish wholesale distribution company, FY2025, revenue EUR 34M, IFRS reporter. Fernandez sells fast-moving consumer goods to approximately 200 retail customers across the Iberian peninsula. Payment terms range from 30 to 90 days. The gross trade receivable balance at 31 December 2025 is EUR 5.8M.
Step 1 — Confirm receivable balances
The auditor selects 40 customer accounts for positive confirmation, covering EUR 4.1M (71% of the gross balance). Selection targets all balances above EUR 50,000, all balances overdue by more than 60 days, accounts with credit notes issued in the final quarter, and a random sample of the remaining population. Confirmation requests are sent directly to customers under the auditor's control per ISA 505.7.
Documentation note: record the selection criteria, the total population, the coverage percentage, and the date confirmation requests were dispatched. File copies of the confirmation letters and note the response deadline set at 21 days.
Step 2 — Evaluate confirmation responses and exceptions
After 21 days, 28 confirmations are returned (70% response rate). Three responses report differences totalling EUR 62,000. The auditor investigates each difference: two relate to goods in transit at year-end (EUR 45,000), supported by shipping documents dated 29 December 2025. One relates to a disputed invoice of EUR 17,000 for alleged damaged goods. For the 12 non-responses, the auditor performs alternative procedures per ISA 505.12, tracing subsequent cash receipts received by 31 January 2026 for nine accounts (EUR 1.05M) and examining shipping documents for the remaining three (EUR 180,000).
Documentation note: record each exception investigated, the alternative procedures performed for non-responses, and the evidence obtained. For the disputed invoice, document management's assessment of the claim and the auditor's evaluation of whether an allowance is needed.
Step 3 — Test the expected credit loss allowance
Fernandez uses an ageing matrix with four buckets: current, 31–60 days, 61–90 days, and over 90 days. Management applies loss rates of 0.5%, 2%, 5%, and 15% respectively. The auditor tests these rates against actual write-off data from FY2023 and FY2024, adjusting for the loss of one significant customer in September 2025. The auditor's independent calculation produces an allowance of EUR 174,000 against management's recorded allowance of EUR 148,000. The difference of EUR 26,000 is added to the summary of uncorrected misstatements.
Documentation note: record the ageing matrix, the historical loss rates used, the forward-looking adjustment for the lost customer, the auditor's independent calculation, and the comparison to management's allowance. Reference IFRS 9.5.5.15 for the simplified approach and ISA 540.18 for evaluating the reasonableness of the estimate.
Conclusion: the receivables balance is supported by confirmation evidence covering 71% of the gross balance, alternative procedures for non-responses, and an independent recalculation of the expected credit loss allowance that identified a EUR 26,000 understatement added to uncorrected misstatements.
Why it matters in practice
- The FRC's 2023/24 inspection cycle found that auditors on smaller engagements often accepted management's ageing matrix without testing the underlying loss rates against actual write-off history. IFRS 9.B5.5.52 requires loss rates to reflect historical credit loss experience adjusted for current conditions and reasonable forecasts. Accepting untested loss rates means the auditor has not obtained sufficient appropriate evidence over the valuation assertion per ISA 500.6.
- Teams frequently send confirmation requests that include the balance amount, prompting customers to agree rather than independently verify. ISA 505.A4 notes that blank confirmations (where the customer fills in the amount) provide more reliable evidence, though response rates are typically lower. The trade-off between reliability and response rate should be documented in the audit strategy.
Accounts receivable vs. accounts payable
| Dimension | Accounts receivable | Accounts payable |
|---|---|---|
| Direction | Amounts owed to the entity by customers | Amounts the entity owes to suppliers |
| Primary assertion tested | Existence (confirming that recorded receivables are real) | Completeness (confirming all liabilities are recorded) |
| Key audit procedure | External confirmations under ISA 505 | Matching post-year-end invoices to goods received before year-end |
| Valuation risk | Expected credit loss allowance may be understated | Accrued liabilities may omit items where invoices have not arrived |
| Balance sheet presentation | Current asset (or split current/non-current if terms exceed 12 months) | Current liability |
The asymmetry between the two is what drives audit strategy. Receivables carry existence risk because entities may overstate assets. Payables carry completeness risk because entities may understate liabilities. The auditor's confirmation programme targets the first; cut-off and search-for-unrecorded-liabilities procedures target the second.
Related terms
Frequently asked questions
How do I audit accounts receivable when confirmation response rates are low?
Apply alternative procedures under ISA 505.12. Trace subsequent cash receipts to the receivable balance, examine shipping documents or delivery evidence confirming the goods were dispatched before year-end, and review sales contracts for agreed payment terms. If alternative procedures cannot cover specific balances, consider whether the inability to confirm represents a scope limitation under ISA 705.13.
When should I recognise a receivable instead of a contract asset?
Recognise a receivable when the entity's right to consideration is unconditional (only the passage of time is needed before payment). If the entity must still perform additional obligations before the right to payment becomes unconditional, the balance is a contract asset under IFRS 15.107. The distinction affects balance sheet classification and the applicable impairment model under IFRS 9.
Does the simplified expected credit loss approach apply to all receivables?
IFRS 9.5.5.15 permits the simplified approach for trade receivables that do not contain a significant financing component. For receivables with a significant financing component (payment terms beyond 12 months, for instance), IFRS 9.5.5.15 gives entities a policy choice: apply the simplified approach or the general three-stage model. Most mid-market entities with standard trade terms of 30 to 90 days qualify for the simplified approach.