- 20 Marks
AA – L2 – Q51 – Audit Evidence
Question
our firm is the auditor of Kumasi Manufacturing Ltd, and you have been asked to suggest the audit work you will carry out in verifying accounts payable and purchase accruals at the company’s year-end of 30 September 2025. You attended the inventory count at the year end.
The company operates from a single site and all raw materials for production are received by the goods inwards department. When the materials are received they are checked for quantity and quality to the delivery note and purchase order, and a multipart goods received note is made out and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy note is raised which gives details of the problems (e.g. incorrect quantities or faulty materials).
The purchase accounting department receive the purchase invoices, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a PC.
The main sundry payables and accruals at the year-end include:
(i) wages accruals and associated taxes payable;
(ii) sales taxes payable;
(iii) time dependent accruals, such as interest on loans and overdrafts, telephone, heat and light, and other expenses paid in arrears.
Most employees’ wages are paid weekly in arrears.
Required:
(a) Describe in detail the audit work you will carry out to check suppliers’ statements to the balances on the purchase ledger.
(b) Verify that purchases cut-off has been correctly carried out at the year-end.
(c) Ensure that sundry payables and accruals are correctly stated.
Answer
(a) Checking suppliers’ statements to the balances on the purchase ledger:
Assess the system of control in the purchases system and its reliability. If discrepancy staff regularly perform checks on the supplier’s statements then perform fewer checks and instead rely on their work as evidence. Generally, check a larger proportion of suppliers where the balances are large, or where there are a large number of transactions. If no statements are available from a particular supplier then consider telephoning to confirm the balance instead.
If the balance on the supplier’s statement agrees to the balance on the purchase ledger then no further work needs to be carried out.
If differences arise they will be due to a number of occurrences, such as:
- goods in transit;
- cash in transit; and
- other differences such as incorrect treatment of discounts.
Goods in transit are invoices on the supplier’s statement which are not on the customer’s purchase ledger. If these differences have been included in purchase accruals no further checks are necessary. However, for large value items, check the goods received note (GRN) to ensure they were received before the year-end.
Cash in transit may be verified by checking against the following month’s supplier’s statement.
Other differences, such as discounts, need only be investigated if they are material.
(b) Verification of purchases cut-off:
In order to complete an adequate cut-off test for purchases and goods inwards the ideal starting point is the population of goods received notes.
A sample should be selected that includes items from both before and after the year end.
For each item, it will be ensured that the date included in inventory, the purchase invoice date and the date posted to the purchase ledger all correspond. For example a goods received note dated before the year end means the following:
the items should be in inventory;
the purchase invoice should be included in the income statement/statement of comprehensive income and dated before the year end;
the purchase ledger should include the purchase invoice before the year end.
A cut-off error will exist if the items are not recognised in the correct accounting period.
(c) Audit work on sundry payables and accruals:
Compare to the previous year’s figures and identify any material fluctuations.
Net wages accruals and tax/social insurance payables can be verified by referring to the monthly payroll. Normally it would be expected that one month of each may be outstanding.
The sales tax payable is verified by agreeing the amount to the tax return and then agreeing the tax return calculation by checking input tax to the purchase day book, output tax to the sales day book and any sundry amounts to either cash book or petty cash book.
Accrued interest on the bank loan and overdraft will be checked to the bank letter.
Other accruals will be checked to invoices received after the year-end (or if no invoices have been received after the year end, then invoices received before the year end will be used).
Consider whether there are any circumstances which have arisen in the year which may result in new accruals, and check if these accruals have been included.
- Tags: Accruals, Audit Evidence, Payroll, Substantive Procedures, Sundry Payables, Taxes
- Level: Level 2
- Topic: Audit Evidence
- Uploader: Samuel Duah