Company R is a company based in the UK that manufactures home furnishings for the wholesale trade. You are a member of the audit team of Rex Auditors and the year end audit for Company R is due to commence. The financial statement year end is 31^st January 20X2 This is the first year that your audit firm has audited company R.

The audit manager has attended a planning meeting with the finance director of Company R and you have been provided with the planning notes from the meeting and other enquiries made by the audit team. You have been asked to consider the audit risks over the receivables for this company and provide an appropriate audit response over each risk.

Company R have several trade customers based in France and Germany that have outstanding receivables balances at the year end. The sales made to these customers account for approximately 35% of the overall sales revenue for the year.

During the year new sales initiatives were introduced by management, designed to increase total sales revenue for the year. Generous credit terms of 60 days were offered to all new customers. All existing customers had their credit terms extended to 90 days if they increased the value of their sales orders by 30%. It has been noted that the management at Company R benefit from a generous bonus scheme which is based on achieving monthly sales targets.

During the year, general economic conditions in the UK have impacted on this industry which has resulted in two of Company R’s main customers struggling to pay their outstanding debts to Company R.

You have carried out a preliminary analytical review: As part of the review, it is noted that receivables days have increased from 37 to 55 days and that total trade receivables have increased by 52% compared to the previous year’s figures.

On 15^th February 20X2 Company R issued a credit note (in relation to a disputed invoice) to a customer for the sum of £129,000 which was more than 90 days overdue at the year end.

Required;

1. Explain the procedures for conducting a receivables circularisation for Company R.