Inventories, Accounts Payable, and other Liabilities

Problem 14-37

a ) The key audit objectives of accounts payable are completeness accuracy , rights and obligations and existence of trade creditors . With respect to trade creditors the auditor main aim is to ensure that all transactions were recorded at the right time and the correct amount This is particularly important because understatement of liabilities may occur in to boost liquidity and profitability (ACCA Study Text 2000 ,

276-277 . The auditor should also ensure that all the trade payables listed actually exist and the amounts due stem from business operations

b

) Accounts payable confirmations are rarely used in practice , unlike the case given in this question . Normally the company would already hold evidence from trade creditors of the same appropriateness that can be used for such purpose . For example , the suppliers ' statements receive each month by the company can be utilized . Account payable confirmations are used either when this information lacks when indications of manipulation of accounts payable exists the account balance seems irregular with respect to the organization and past year balances and /or a weak internal control system exists necessitating such testing to identify material misstatements if any (ACCA Study Text 2000 ,

277

c ) In the selection of the creditors ' sample , the auditor should not select the accounts payable of the highest value . We should keep in mind that understatement of accounts payables , which an important concern in this area , can arise even for low-value creditors . Therefore by selecting material creditors , the auditor is not selecting a sample that minimizes the risk of creditors misstatement . He should therefore seek the whole population , namely nil or negative purchase ledger balances (ACCA Study Text 2000 ,

277

Problem 14-38

In instances of weak internal controls and trade accounts payable being a high risk audit area , the following substantive tests are advisable (Woolf E . 1997 ,

190

Take a sample of purchase ledger balances and reconcile them with suppliers ' statements . If supplier statements are not available use circularization (swlearning ,

11

Cast list of balances and trace Examine a sample of additions to the purchases ledger during the year

Enquire on the reasons behind the creation of debit balances in the purchases ledger and attain reasonable assurance that they are recoverable

Obtain a list of debit balances in the purchases ledger and check that they are separately shown and classified under the debtors heading in the financial statements

Check if a purchases ledger control account is prepared by the company audited . If this is the case , examine a control account for a particular month to ensure it is being performed properly . Analyze such control accounts for any unusual items

Examine appropriate cut-off by ensuring that stock received up to the balance sheet date that is not yet invoiced by the creditor have been correctly provided for and considered as stock . Such analysis is performed by referring to last delivery notes and goods inward records of the year and the first of the next financial year

Enquire the terms of sales...