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Syllabus D. Audit Evidence D4. The audit of specific items

D4c. Payables - Trade

Syllabus D4c)

Explain the audit objectives and the audit procedures in relation to: Payables and accruals:
i) supplier statement reconciliations and direct confirmation of accounts payable,
ii) obtain evidence in relation to payables and accruals, and
iii) purchases and other expenses.

Payables are usually tested for understatement

Testing for overstatement = Testing for existence
Testing for understatement = Testing for completeness

Testing for completeness is harder because you're looking for something that has not been recorded

(whereas when testing for existence you can audit something that is there)

Main Risks with Payables

  • Not all recorded

  • Cut-off incorrect

  • Some included that aren't an obligation for the client (rare)

  • Not properly disclosed

Substantive Procedures

  • Get a list of balances

  • Check arithmetical accuracy

  • Check total agrees to payables control account

  • Check a sample from supplier statements to listing (completeness)

  • Definitely choose nil and negative balances

  • Definitely choose major suppliers

  • Any differences to be reconciled by the client with explanations

  • To test completeness further:

    1) Check all regular suppliers are in list
    2) Compare to P/Y listing
    3) Analytical Procedures: Trade payables to purchases ratio

Purchases Cut-off

  • Goods received before year end - should be shown in inventory and as a liability

  • Goods received after year end - not shown as a liability