AAA – L3 – Q39 – Audit evidence

Audit procedures for Nexu Co's purchases and payables, controls, and use of automated tools.

Question

Nexu Co assembles mobile telephones in a large factory. Each telephone contains up to 100 different parts, with each part being obtained from one of 50 authorised suppliers.
Like many companies, Nexu’s accounting systems are partly manual and partly computerised. In overview the systems include:
(i) Design software
(ii) A computerised database of suppliers (bespoke system written in-house at Nexu)
(iii) A manual system for recording goods inwards and transferring information to the accounts department
(iv) A computerised payables ledger maintained in the accounts department (purchased off-the-shelf and used with no program amendments)
(v) Online payment to suppliers, also in the accounts department
(vi) A computerised general ledger which is updated by the payables ledger
Mobile telephones are assembled in batches of 10,000 to 50,000 telephones. When a batch is scheduled for production, a list of parts is produced by the design software and sent, electronically, to the ordering department. Staff in the ordering department use this list to place orders with authorised suppliers. Orders can only be sent to suppliers on the suppliers’ database. Orders are sent using electronic data interchange (EDI) and confirmed by each supplier using the same system. The list of parts and orders are retained on the computer in an ‘orders placed’ file, which is kept in date sequence.
Parts are delivered to the goods inwards department at Nexu. All deliveries are checked against the orders placed file before being accepted. A hand-written pre-numbered goods received note (GRN) is raised in the goods inwards department showing details of the goods received with a cross-reference to the date of the order. The top copy of the GRN is sent to the accounts department and the second copy retained in the goods inwards department. The orders placed file is updated with the GRN number to show that the parts have been received.
Paper invoices are sent by all suppliers following dispatch of goods. Invoices are sent to the accounts department, where they are stamped with a unique ascending number. Invoice details are matched to the GRN, which is then attached to the invoice. Invoice details are then entered into the computerised payables ledger. The invoice is signed by the accounts clerk to confirm entry into the payables ledger. Invoices are then retained in a temporary file in number order while awaiting payment.
After 30 days, the payables ledger automatically generates a computerised list of payments to be made, which is sent electronically to the chief accountant. The chief accountant compares this list to the invoices, signs each invoice to indicate approval for payment, and then forwards the electronic payments list to the accounts assistant. The assistant uses online banking to pay the suppliers. The electronic payments list is filed in month order on the computer.

Required
(a) List the substantive audit procedures you should perform to confirm the assertions of completeness, occurrence and cut-off for purchases in the financial statements of Nexu Co. For each procedure, explain the purpose of that procedure.
(b) List the audit procedures you should perform on the trade payables balance in Nexu Co’s financial statements. For each procedure, explain the purpose of that procedure.
(c) Describe the control procedures that should be in place over the standing data on the trade payables master file in Nexu Co’s computer system.
(d) Discuss the extent to which automated tools and techniques might be used in your audit of purchases and payables at Nexu Co.

Answer

(a) Substantive Audit Procedures for Purchases Assertions (Completeness, Occurrence, Cut-off)

Procedure 1: Select a sample of goods received notes (GRNs) from the goods inwards department and trace them to the corresponding purchase invoices in the payables ledger.
- Purpose: To confirm completeness by ensuring all goods received (and thus purchases) are recorded in the financial statements.
Procedure 2: Select a sample of purchase invoices recorded in the payables ledger and agree them to the corresponding GRNs and orders in the ‘orders placed’ file.
- Purpose: To confirm occurrence by verifying that recorded purchases relate to valid orders and goods actually received.
Procedure 3: Perform a cut-off test by selecting a sample of GRNs and invoices recorded just before and after the year-end, and verify the date of receipt and invoice to ensure they are recorded in the correct period.
- Purpose: To confirm cut-off by ensuring purchases are recorded in the period in which the goods were received.
Procedure 4: Review the ‘orders placed’ file for any unmatched orders (i.e., without GRNs) to identify potential unrecorded purchases.
- Purpose: To confirm completeness by identifying goods ordered but not yet recorded as received or invoiced.
Procedure 5: Perform a reconciliation of supplier statements to the payables ledger and investigate any discrepancies.
- Purpose: To confirm completeness and occurrence by ensuring all valid purchase transactions are recorded and no fictitious purchases are included.
Procedure 6: Inspect a sample of electronic data interchange (EDI) confirmations from suppliers to verify that orders placed match the recorded purchases.
- Purpose: To confirm occurrence by ensuring recorded purchases are supported by valid supplier confirmations.

(b) Audit Procedures for Trade Payables Balance

Procedure 1: Obtain a listing of trade payables at year-end and agree the total to the general ledger and financial statements.
- Purpose: To confirm the accuracy and completeness of the recorded payables balance.
Procedure 2: Select a sample of payable balances and agree them to supplier statements or request direct confirmation from suppliers.
- Purpose: To confirm existence and completeness by verifying that recorded payables are valid and all liabilities are included.
Procedure 3: Review the aged payables listing for old or unusual balances and investigate with management.
- Purpose: To confirm valuation and completeness by identifying potential unrecorded or disputed liabilities.
Procedure 4: Perform a search for unprocessed invoices and GRNs received after year-end to identify liabilities not recorded at year-end.
- Purpose: To confirm completeness by ensuring all liabilities for goods received by year-end are included.
Procedure 5: Inspect the payments list generated after year-end and verify that payments relate to invoices recorded as payables at year-end.
- Purpose: To confirm existence and cut-off by ensuring payables are not overstated by including paid amounts.

Control 1: Restrict access to the trade payables master file to authorised personnel only, using password protection and user access levels.
Control 2: Implement a formal process for adding or amending supplier details, requiring approval from a senior manager.
Control 3: Perform regular reconciliations of the master file to supplier statements to identify and correct errors in standing data.
Control 4: Maintain a log of all changes to the master file, including the date, user, and nature of the change, for audit trail purposes.
Control 5: Conduct periodic reviews of the master file to remove inactive or duplicate suppliers, ensuring data accuracy.

(d) Use of Automated Tools and Techniques in Audit of Purchases and Payables

Data Analytics: Automated tools can analyse the entire population of purchase transactions to identify anomalies, such as duplicate invoices or unusual payment terms, improving the efficiency and effectiveness of testing completeness and occurrence.
Computer-Assisted Audit Techniques (CAATs): Use CAATs to test the matching of GRNs, invoices, and payments in the payables ledger, ensuring cut-off and accuracy by processing large volumes of data quickly.
EDI System Testing: Automated tools can extract and analyse EDI confirmations to verify the occurrence of orders and ensure consistency with the ‘orders placed’ file.
Continuous Auditing: Implement real-time monitoring of the payables ledger to flag exceptions (e.g., unmatched GRNs or overdue payments), allowing for timely audit procedures on completeness and valuation.
Limitations: Automated tools rely on the integrity of Nexu’s systems. Manual processes (e.g., handwritten GRNs) may require additional substantive testing, and bespoke systems may need IT specialist input to assess reliability.

Tags: Audit Procedures, Automated tools, Controls, Payables, Purchases
Level: Level 3

Topic: Audit Evidence

Uploader: Salamat Hamid