- 12 Marks
AA – L2 – Q40 – Audit Evidence
Question
n your audit procedures to date you have found a large number of misstatements in your client’s payables ledger. You have decided to write to a number of trade payables to obtain direct confirmation of the balances due.
Required
(a) The confirmation letter to the suppliers could either state the balance or ask the supplier to give the balance himself. Set out the arguments for each of these two approaches.
(b) List other substantive procedures which you could use to verify the amount of trade payables.
(c) List the substantive procedures you would carry out to discover the existence of unrecorded liabilities.
Answer
(a) Suppliers are more likely to reply if the balance is given as there is less work involved for them. However, there may be a temptation just to agree the balance without checking it for timing differences or errors.
If the balance is given, the supplier may reconcile any difference. This is not possible if no balance is stated. In addition, the existence of any difference will alert the supplier to a potential need to take action.
If the balance is not given, suppliers may gain the impression that the client’s records are so inadequate that the client does not know what the balance should be.
(b) Examine supplier statement reconciliations. Balances should have been agreed/reconciled by the client and the detail on the statement agreed with the client’s records.
Test the reconciliation of the list of payables ledger balances to the balance on the payables ledger control account.
Match after date payments to year end balances.
Review cut-off procedures and test by reference to last delivery notes/goods received records prior to the year end and first ones after the year end.
Compare trade payables balances this year end to last year end and investigate any difference.
(c) Inquire as to whether directors are aware of any actual or contingent liabilities other than those recorded in the financial statements.
Review minutes of directors’ meetings.
Examine:
- after date cash book (for post year-end payments of unrecorded year-end liabilities)
- purchase invoices received post year end (to check that if they relate to pre year-end purchases, that those purchases have been accrued for)
- sales returns made post year end (to see if a returns allowance is needed).
Compare liabilities last year end to this year end to see if similar categories of liabilities have been omitted this year.
Request the directors to confirm the completeness of liabilities in their written representation letter.
- Tags: Audit Evidence, Payables Ledger, Substantive Procedures, Unrecorded Liabilities
- Level: Level 2
- Topic: Audit Evidence
- Uploader: Samuel Duah