TRADE PAYABLES

Audit procedures are similar to those of recievables. Just few things to keep in mind.

the auditor will be particularly worried about the possible understatement of

payables: how can the auditor detect a payable that is missing form the financial
statements?
How do you check that?
1) reconcile the sum of the individual payables balances to the balance on the
control account. In other words, the total of payables in the statement of financial
position agrees to the detailed amounts payable to each supplier.
2) Correspondence with suppliers and board minutes may allow identification of
disputes or amounts which might not be paid, or amounts which may not yet
appear in the payables ledger, but which are been claimed by suppliers or other
parties. It’s often by reviewing correspondence in board minutes that contingent
liabilities are discovered. Contingent liabilities arise because of some event
which has already happened, but whose outcome is uncertain. For example, a
legal claim. Later you will see how contingent assets and contingent liability
should be treated in the financial statements.
3) Trace from purchase orders to goods received notes (where relevant) to
purchase invoices and credit entries in suppliers’ - to ensure completeness and an
accurate cut-off. Trace from credit entries in the accounts to purchase invoices
then back to goods received notes (where relevant) and purchase orders - to
ensure existence.
4) Trace from cash book payments (before and just after year end) to suppliers’
accounts and vice versa - to ensure accurate cut-off. Reviewing after-date
payments may identify year-end liabilities; if not included in the payables
balance these will need to be accrued
5) Payment period, that is the number of days of purchases in payables. It is
calculated as payables divided by purchases per day. If the payables period
increases, it may indicate that the company is being more careful about when
payments are made, but it could indicate that the company is having difficulty
making payments as they become due. By increasing the payables period, the
company might begin to lose out on receiving cash discounts. This can become
quite an expensive source of finance and needs some explanation.
6) Carry out or reperform reconciliations of individual payables balances to
suppliers' statements. If the client does not receive regular monthly statements
from suppliers, the auditor may use external confirmation procedures to request
direct evidence of amounts owing at the reporting date.
7) Suppliers' statement reconciliations are the main audit procedure to verify the
completeness of trade payables. All reconciling items must be properly
accounted for. For example:
‣ Cash-in-transit (i.e. payments by client not received by supplier) - confirm that
payment appears on the bank statements shortly after the year end;
‣ Goods-in-transit (i.e. goods invoiced by supplier not recorded by the client) -
confirm that goods were received after the year end or, if received before the year
end, that the invoice has been accrued;
‣ Disputed invoices (e.g. not recorded by the client because the goods were
refused or returned) - if dispute is valid, invoice should be subsequently
cancelled with a credit note from the supplier