(a) Inherent risk – trade payables
In my audit of trade payables I would regard completeness as presenting the greatest level of inherent risk for the following reasons:
(i) Management has an incentive to understate purchases and thus payables in order to improve profits. This applies not only to senior management but also to line managers who are close to budgetary limits on certain expenditures and are under pressure to withhold recording of suppliers’ invoices until after the year end.
(ii) Senior management may be under pressure to understate payables in order to improve the company’s apparent liquidity. This would be the case if the company were seeking to raise additional finance or to renew existing borrowing agreements. The more liquid the statement of financial position shows the company to be the more favourable the terms are likely to be.
(iii) Principal control procedures placed in operation by the company relate to the occurrence assertion in order to prevent improper purchasing by employees or overpayments to suppliers.
(iv) The primary source of information initiating recognition of a liability is the supplier’s invoice. During the year the company has no incentive to accelerate the receipt of suppliers’ invoices. This means that, as at the end of the reporting period, there could be outstanding claims not yet invoiced by suppliers which the entity has no formalised procedures for identifying promptly.
(v) Valuation is rarely a problem except in complex contractual situations where the amount due is contingent upon some future event such as a volume discount dependent on total purchases at some future date exceeding some agreed amount.

(b) Accounts payable circularisation
In my audit of Mark Motorcycles I would not normally undertake a payables’ circularisation for the following reasons.
(i) For payables, much of the documentary evidence available is in the form of third party sourced suppliers’ invoices and statements, in contrast to accounts receivable for which most of the available documentation is entity prepared.
(ii) Examination of documentary evidence is usually a cheaper form of substantive evidence than external confirmation.
(iii) Although examination of third party sourced documentary evidence is less reliable than external confirmations received directly by the auditor, it usually provides sufficient evidence.
I would, however, consider an accounts payable circularisation in the following situations.
(iv) A substantial proportion of the company’s suppliers does not issue monthly statements.
(v) Statements from suppliers with whom the company does substantial business are unexpectedly unavailable for the last month of the year.
(vi) Only fax or photocopies of statements are available whose authenticity is doubtful.
(vii) I have reasons to suspect that the company, or a member of the company’s staff, may be deliberately understating liabilities and there is a possibility that some of the suppliers’ statements may be forgeries given the ease of replicating documents with modern scanning and desk top publishing technology. Assessment of control risk as slightly less than high, the limited segregation of duties, and the failure to routinely reconcile all statements with the accounts payable ledger mean that this is not necessarily a remote possibility.

(c) Substantive procedures applicable to production payables
Initial procedures
(i) Obtain a list of such accounts payable and test its accuracy by testing it to and from the computer records and adding it and agreeing it to the control account. (If production payables are not segregated from other payables this procedure will apply to all payables.)
Analytical procedures
(ii) Perform analytical procedures on accounts payable and compare the results with expectations:
compare current year’s balance with previous years;
compare the average age of payables with previous years;
compare gross profit with previous year and industry average.
Tests of details of transactions
(iii) Ascertain cut-off data for goods received notes (GRNs) (probably obtained during attendance at the physical inventory count).
(iv) Check cut-off by obtaining GRNs for two weeks prior to the year end and:
checking their numerical continuity;
tracing GRNs to the purchases recorded before 31 October or the accrual journal entry.
(v) For a smaller sample I would verify the existence of recorded purchases prior to the year-end by vouching a sample of purchases and purchase accruals to GRN’s in the sequence issued prior to the year end.
(vi) For a sample of the closing accruals I would verify the amount of the accrual by vouching the amount to a subsequently received supplier’s invoice.
Tests of details of balances
(vii) Select a sample of accounts payable using criteria such as:
all suppliers from whom the entity bought more than 1% of its purchases during the year;
a random sample of all other suppliers including nil and credit balances;
(viii) For each supplier in the sample I would compare the balance with the supplier’s statement and investigate differences.
(ix) If any supplier’s statements were unavailable I would consider the balance directly with the supplier.

(d) Verifying the completeness of non-production payables
Detection risk over the completeness assertion must be set as low because the assessment of control risk as only just less than high and from because identified in obtaining the understanding of the accounting system in that:
(i) there are no goods received notes to determine the date of receipt of the goods;
(ii) invoices are not recorded until after approval by the department which could cause considerable delay and even a failure to record invoices mislaid or even lost before being recorded;
(iii) suppliers’ statements are not reconciled which would otherwise detect most delayed or missing invoices.
(e) My audit procedures would be centred on cut-off and the search for unrecorded liabilities.
(i) Vouch purchases entered in the purchase journal as at 31 October (including those entered while the journal was held open after the year end) to invoices to verify that they are properly recorded as accounts payable at the end of the reporting period.
(ii) Vouch larger purchases recorded in the first two weeks of the subsequent year to invoices to ensure that they are properly recorded after the year end.
(iii) Obtain suppliers’ statements from major suppliers and reconcile them with the balance in accounts payable for evidence of invoices missing or mislaid.
(iv) Review outstanding purchase orders for evidence of goods or services received prior to the year-end not yet invoiced by the supplier.
(v) Similarly vouch cash payments for the first two weeks after the end of the reporting period for payments for goods and services received before the year-end not processed as payables.
(vi) Review both purchases and cash payments for items that may relate to goods or services received prior to the end of the reporting period. This review should be continued up to the date of signing the auditors’ report.
(vii) Compare prepayments and accruals with the previous year for items such as rent or utility bills normally paid in advance or arrears of receipt of goods and services and investigate differences.
(viii) Analyse expense accounts for significant differences either in absolute amounts or relative to sales. Any unexpected difference could be due to unrecorded purchases at the end of the reporting period.