Turning Receivables Into Accounts Payables

Hi all,
I have a client who uses their revenue collection (accounts receivable) system to process creditors in their ledger, effectively turning the receivable system into a payable system in one big swoop.
To give you an example, please study the double entry journal below and note how the debtor’s account is deliberately credited with the amount of invoice ($100.00) from the creditor:
Dr Revenue a/c $100.00 CR Debotr’s a/c $100.00
(To recognise the liability for the invoice.)
Dr Debtor’s a/c $100.00 Cr Cash at Bank $100.00
(To pay the creditor.)
Conversely, my client would also net off sales returns against current year’s revenue, irrespective when the revenue was recorded against the sales returns.
The journal entry for the sales return is:
Dr Revenue a/c $20.00 Cr Cash at Bank $20.00
(To refund past year’s sales returns.)
Following the above treatment, the auditors are concerned about:
(1) the lack of segregation between debtors and creditors control; (2) the lack of transparency between assets and liability; (3) the possibility of miss-reporting certain debtors as creditors, and vice versa; and (4) netting off past year’s returns against current year’s revenue, violating against generally accepted accounting principles.
Would you have any problem with the auditor?
Many thanks,
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