Key audit matter, expected credit loss allowance, distributor

[Company name] distributes [product category] through a network of [number] dealers spread across [number] states, with trade receivables of Rs [amount] crore at the year end against which an expected credit loss allowance of Rs [amount] crore is carried under the Ind AS 109 simplified approach. We identified this as a key audit matter because: (a) the provision matrix rests on historical loss rates by ageing bucket, adjusted for forward-looking factors, both of which involve significant estimation uncertainty; (b) a small number of dealers under financial stress, including one dealer admitted to the Corporate Insolvency Resolution Process during the year, required individual assessment outside the matrix; and (c) receivables and their allowance are large relative to materiality, and management's incentive structure is linked to distribution sales, which creates an inherent pressure toward under-provisioning.

We evaluated management's provision matrix methodology against Ind AS 109 and independently re-derived the historical loss rates from three years of the Company's own write-off and recovery data, extracted directly from the system rather than taken from management's working. We independently re-performed the receivables ageing from the contractual due date, as at C.6, and reconciled it to the matrix. For the dealer under CIRP, with a receivable of Rs 54.00 lakh against which management had provided 40%, we obtained and inspected the resolution professional's claim admission and evidence of comparable recoveries in similar admitted claims, which supported a 100% provision; we recorded the resulting difference of Rs 21.60 lakh as an audit adjustment (see C.25). We challenged the forward-looking overlay against sector default data and tested post-year-end cash collections for the largest twenty balances. We tested the completeness and arithmetical accuracy of the matrix and its agreement to the Schedule III ageing disclosure.