AUDIT OBSERVATION MEMO Ref: AO-2024-031 | Date: 14 November 2024 Client: [Company Name] | Area: Trade Receivables | Risk: High Observation During our review of the trade receivables ledger, we noted that outstanding balances from three debtors totalling ₹18,40,000 have remained unpaid for more than 180 days. No provision for doubtful debts has been recognised in the financial statements, and no balance confirmation letters have been dispatched to these parties during FY 2024–25. Criteria As per AS 13 (Accounting for Investments) read with the prudence concept under AS 1, and the company's internal credit policy, debts outstanding beyond 180 days are required to be assessed for impairment. Balance confirmations should be obtained annually as part of standard receivable management. Cause The collections team has been in informal communication with these debtors, and management has not initiated formal confirmation or provisioning procedures in anticipation of recovery. Effect / Risk Trade receivables and net profit may be overstated by up to ₹18,40,000. This represents a material misstatement risk that could impact the true and fair view of the financial statements. Recommendation Management should (1) immediately dispatch balance confirmation letters to all three debtors, (2) obtain written recovery commitments, and (3) create a provision for doubtful debts of at least 50% (₹9,20,000) pending confirmation of recoverability. Management Response Management has stated that the debtors in question are expected to settle outstanding amounts within the next quarter. Written confirmation of this commitment has been requested.