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PRACTICAL AUDIT ON TRADE PAYABLE AND TRADE RECEIVABLE (Lesson)

I.INTRODUCTION

In practice, trade receivables and payables in Company are important, so company should trace regular trade receivables and payables to avoid error or fraud. The strong internal control is way to reduce these risks.

Official invoices, official receipts and daily cash receipt are based to audit trade receivables.

Official invoices, official receipts, payment voucher and daily cash payment are based to audit trade payables.

II.TRANSACTIONS, EVENT AND ACCOUNT BALANCE ASSERTION

Transactions & Events:

  1. Occurrence
  2. Completeness
  3. Accuracy
  4. Cut-off
  5. Classification

Account Balances

  1. Existence
  2. Rights & Obligations
  3. Completeness
  4. Valuation & Allocation

 Completeness- all transactions, assets, liabilities and equity interests have been recorded that should have been recorded.

Accuracy- amounts, data and other information have been recorded and disclosed appropriately.

Cut-off- transactions and events have been recorded in the correct accounting period.

Classification and understandability- transactions and events have been recorded in the proper accounts, and described and disclosed clearly.

Existence- assets, liabilities and equity interests exist.

Rights and obligations- the entity holds or controls the rights to assets and liabilities are the obligations of the entity.

Valuation and allocation- assets, liabilities and equity interests are included in the financial statements at appropriate values.

III. AUDIT PROCEDURE FOR TRADE RECEIVABLES

In order to verify the figure in the financial statements for receivables the auditor would perform a number of substantive procedures as outlined below.

Control account:

List of receivable balance in the sales ledger agree the total with control account.

Year end receivable account balance:

  • Aged debt listing and overdue debts ( allowance for doubtful debts)
  • Check the authorisation for debt written off
  • Contra entries should be made to net off to avoid overstating both assets and liabilities.
  • Check that the balance are made up of specific invoices
  • Direct confirmation/ circularisation
  • Review the individual accounts of major customers.
  • Review and test the year end cut-off procedures.

Analytical Procedure:

  • A comparison of receivable days ratio= ( receivables/sales) x 365 with budget and /or prior years, also with similar companies.
  • A comparison of the proportion of the debts in different age band to prior years.

Old debts may indicate either poor or deteriorating economic condition or credit control.

Irrecoverable Debts:

Audit procedures includes as follows.

  • Previous irrecoverable debt experiences
  • Receivables’ circularisation/confirmation
  • Aged analysis of receivable
  • Events after the reporting period

Returns inwards and Credit Notes:

From an audit point of view the major problems is likely to be the issue of a substantial volume of credit notes after the year end.

Trade Receivable Existence and Completeness:

For a sample of trade payables balances, obtain supplier statements and reconcile these to the purchase ledger balances, and investigate any reconciling items: verifies existence and completeness.

IV. AUDIT PROCEDURE FOR TRADE PAYABLES

Always bear in mind that the audit emphasis here will be on completeness – have all payables that exist been fully recorded in the financial statements?

The main verification procedures are as follows:

  • Check control account and the payables’ ledger
  • Review the individual accounts with largest volume of transactions during the period.
  • Review the year-end cut-off procedures for purchases:
    • Does the balance agree with the supplier’s statements?
    • Payables circularisation
    • Review payments to payables just after the year end.
  • Analytical procedure, comparing age analysis with previous periods, and payables days =( payables/ costs of sales ) x 365  to detect possible unrecorded payables.
  • Auditor’s knowledge that ABC is a major supplier, but owing to ABC is small, so investigate.

V. PRACTICAL DOCUMENTS FOR TRADE PAYABLE AND RECEIVABLE AUDIT

  • Customer order
  • Sale order
  • Delivery note to customer
  • Official invoice
  • Official receipt
  • contracts
  • Purchase orders
  • Delivery note from supplier
  • Goods received note
  • Invoice from supplier
  • Payment voucher
  • Daily cash report ( most important)
  • Cash book, Bank statement and bank reconciliation etc.

LET’S DO PRACTICAL QUESTIONS

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