Tag (SQ): Trade Payables

Peak Cycles is a small manufacturing company of which your firm of Chartered Accountants is the external auditor. You have been assigned to the audit of the payables.
The audit file indicates that control risk for purchases and payments transactions is assessed as slightly less than high because of limitations in the extent of segregation of duties due to the small number of accounts personnel. There are no other identified control problems or prior year audit problems.
Narrative notes on the accounting system contain the following descriptions.
Purchases are requisitioned by the user department and ordered, using prenumbered order forms, by the purchasing manager.
Raw materials and manufacturing supplies are delivered to the receiving department of the factory where the receiver issues pre-numbered goods inward notes (GINs).
Purchases of other goods and services are delivered directly to the requisitioning department and no GINs are issued.
The accounts department checks suppliers’ invoices with purchase orders, and

• for production department purchases, with GINs
• for other purchases, sends the invoices to the requisitioning department manager who initials the invoice to indicate that it is appropriate to pay.
  Invoices are then processed to the accounting records using proprietary software.
  All suppliers are paid at the end of the month following the month of receipt of the invoice.
  Payables at 31 October 20X8 therefore represent goods and services invoiced in October. In addition, invoices received between 1 and 15 November were divided into those relating to goods received or services provided before and after 31 October, the former being recorded in the accounting records before the October trial balance was produced. On 15 November, any unmatched GINs relating to deliveries before 31 October were posted to the accounts as at 31 October at the estimated amounts of the invoices.
  Suppliers’ invoices are filed alphabetically with supporting documentation, all of which is cancelled with the date of payment when the cheque is issued. Suppliers’ monthly statements are also filed with the invoices. These are scrutinised by the accounts department for unusual items, such as overdue invoices, but are not regularly reconciled with the company’s own records.
  Required:
  (a)  In your audit of trade payables in the 31 October 20X8 financial statements explain which of the financial statement assertions you would regard as presenting the greatest inherent risk.

(b)  Discuss the reasons for undertaking or not undertaking a payables’ circularisation.

(c) Outline substantive procedures you would apply in your audit of trade payables relating to production department purchases.

(d) Explain additional procedures you would perform in verifying the completeness of non-production department payables.

(e)  Set out the audit procedures you would perform on share capital and reserves.