Part 3(B) : Chapter 3

•Trade receivables/payables

•Inventories

DEFINITION OF TRADE RECEIVABLE

• Trade receivable are due from customers for merchandise sold or services performed in

the ordinary course of business.

Purpose of auditing Trade receivable

• Obtain understand of accounting policies relevant to trade accounts receivable

• Should know the significant types of sale transactions flowing through the account.

• Should evaluate the division’s revenue recognition policy and the right of buyers to return them

• Consider whether the revenue recognition policy is appropriate.

• Auditor should consider and design audit procedures that address relevant presentation and disclosure requirements.

DEFINITION OF TRADE PAYABLE

Account payable include liabilities for which invoices have been received and liabilities for

goods and services received that have not been matched with the related invoices.

Purpose of auditing Trade payable

•To estimate potential losses from open purchase commitments.•Understand the significant types of purchase transaction

AUDIT EVIDENCE FOR TRADE RECEIVABLE AND TRADE PAYABLE

• Used by auditors in arriving at the conclusions on which the audit opinion is based.

• Source of evidence are knowledge of the business and industry, analytical procedures, test of control, direct tests of account balance

AUDIT EVIDENCE Trade Receivable Trade Payable- General ledger, debtor’s ledger, bank

statement, invoice issued and receipt book

- Findings:- Trade receivable balance have been

properly maintained, describe and disclosed

- General ledger, creditor’s statement, bank statement, bills and payment voucher

- Findings:- Trade payable balance have been

properly maintained, describe and disclosed

CONFIRMATION

POSITVE CONFIRMATIONS – Debtor request to reply whether he agrees or not

NEGATIVE CONFIRMATIONS – Request a reply in the case of disagreement

AUDIT OBJECTIVES ON TRADE RECEIVABLE AND TRADE PAYABLE

• TRADE RECEIVABLE-To ensure that trade receivables are properly recorded and genuine-To ascertain whether trade receivables are recoverable

• TRADE PAYABLE-To ensure that trade payables are properly recorded and genuine

AUDIT ASSERTIONS TRADE RECEIVABLEAudit assertions Audit Procedures

Existence Occurrence

-Obtain an aging listing of trade receivable (debtors) balances-Test balances and aging by comparing amounts to sales invoices and the debtors subsidiary ledgers

Existence Valuation

-Select samples of trade debtors account for confirmation and reconcile differences that arise

Valuation Accuracy

-Review aging listing for recoverability of long outstanding balances and check payment history of trade debtors for the period under review

Valuation -consider write off of bad and doubtful debts by discuss with client on their recoverability -reclassifying the credit balances to trade payables-Identify & quantify trade debtors accounts with credit balances at final

AUDIT ASSERTIONS TRADE RECEIVABLE

Audit Assertions Audit Procedures

Existence -Check subsequent payments by trade debtors after year end

Valuation Cut-off -Review credit notes issued subsequent to year-end and ensure that the credits given are not in respect of sales transactions for the year under review

Completeness Cut-off

-determine whether sales and debtors balances are recorded correctly and accurately in proper accounting period

Classification/ understandability

-ensure that trade receivables are properly disclosed in the financial statements

AUDIT ASSERTION TRADE PAYABLE

Audit assertions Audit Procedures

Existence Occurrence

-Obtain an aging listing of trade payables (creditors) balances-Test balances and aging by comparing amounts to suppliers invoices , statements and creditors ledgers

Valuation -Identify and quantify trade creditors accounts with debit balances at year end and consider reclassifying the debit balances to trade receivables

Existence -Select samples of trade creditors for confirmation and reconcile differences that arise-check subsequent payments by creditors after year end

AUDIT ASSERTION TRADE PAYABLE

Audit Assertions Audit Procedures

Completeness ValuationRights/obligations Cut-off

-review suppliers invoices, credit notes and debit notes received after year end for omission of liabilities or over-statement of purchases, where relevant

Completeness -Carry out a year end cut-off test to determine whether purchases and creditors balances are recorded correctly and accurately in the proper accounting period

Classification/ understandability

-Ensure that trade payables are properly disclosed in the financial statements

3.4.5 (a) Construct suitable audit procedures on trade receivable.

Opening balance and general ledgers agreed

to last year trade receivable.

Identify and quantify trade debtors’ account with

credit balances at year end and consider reclassifiying

the credit balances.

Obtain an aging listing of debtors balance and test

balances aging by comparing amount to sales invoices, and

the debtors subsidiary ledgers.

Review credit note issued subsequent to year end and ensure that the credits given

are not in respect

Select sample of debtors for confirmation

differences that arise and check subsequent payment to creditors after year end.

Carry out a year end cut-off test to determine

whether sales and debtors balances are

recorded correctly and accuratedly in the proper

accounting period

Ensure the trade payables are properly disclosed in the F.S

Consider write off bad and doubtful debts by

discussing with client on their recoverability. Note cases that are under legal

action.

Review aging listing for recoverability of long

outstanding balances and check payment history of

debtors

3.4.5 (b) Construct suitable audit procedures on trade payables.

Opening balance and general ledgers agreed

to last year trade payables

Identify and quantify trade creditors’ account with debit balances at year end and consider reclassifiying the debit

balances.

Carry out a year end cut-off test to determine

whether purchases and creditors balances are

correctly and accuratedly in the proper accounting

period

Obtain an aging listing of creditors balance

and test balances aging by comparing amount to suppliers invoices,

statements and creditors ledgers

Review suppliers invoice, credit note and debit

note received after year ommision of liabilities

Ensure the trade payables are properly

disclosed in the F.S

Select sample of creditor for

confirmation differences that arise and check subsequent payment to creditors

after year end.

3.5 Understand the inventories and work in

progress audit.

3.5.1 Explain the purpose of auditing the inventories and work in progress.

To ensure that inventories and work in progress are stated at the lower of cost

and net realisable value.

To ensure that the basis of valuation for inventories is properly and consistently

applied.

To ascertain physical existence of inventories balances as at year end and

ensure that inventories are properly disclosed in the financial statement.

3.5.2 Select an evidence to audit the inventories and work in progress.

• Stock listing / stock card• General leger• sale invoice• Debit / credit note

3.5.3 Apply suitable audit objective and assertions on inventories and work in progress.

Audit objective : to obtain evidence as to the existence as well as ownership and valuation of the inventory.

Audit assertions Specific assertion

Existence Inventory of the company exist at a given date, and recorded transactions have occurred during a given period.

Completeness cut-off Inventory should be presented in the financial statements are so included.

Accuracy Check the state of valuation of inventory in FIFO

realizable value Inventory have been included in the financial statements at appropriate amounts.

3.5.4 Audit test to be used when auditing the inventories and WIP

Substantive test are those activities performed by auditors to evaluate and verify the correctness of monetary amounts in regards to the client’s recording of financial statement balances.

Analytical procedures

Phase 1 – performed during the planning phase to assist in determining the nature, extent and timing of audit work to be performed.

– It will help auditor to identify significant matters requiring special consideration later in the engagement.

3.5.5 INVENTORIES/WIP

No Audit procedures Audit assertion

1 Arrange with client to attend physical court of

inventories, if the inventory balance is material (see

physical court instructions)

Existence

2 Obtain an aging listing of inventories as at year end,

showing quantities and valuation. Check against

inventory cards/ledgers and ensure correct casting.

Existence

Accuracy

3 Check the bases of valuation of inventories ;ie, FIFO,

standard cost, average cost, etc, for raw materials,

work in progress (WIP) and finished goods.

Valuation

Accuracy

No Audit Procedures Audit assertion

4 Where standard casting is used, review the variance

a/c to ascertain the reasons for unusual variances.

Valuation

5 Review write-down for obsolete, slow-moving and

damaged inventories, based on physical court

observations and from review of the aging listing

inventories

Valuation

6 Check reconciliation of inventory control a/c with

inventory subsidiary a/c at the date of physical count and

at year end, ensuring differences between the physical

quantities and the book balances have been properly

accounted for.

Existence

Valuation

No Audit Procedures Audit assertion

7 Carry out a net realizable value (NRV) test to ensure that

inventories are stated at the lower of cost or NRV fair value.

Valuation

8 Perform a cut-off test for purchases and sales by reviewing

purchase orders, goods received notes, sales invoices, debit

notes, credit notes and other relevant documents which

control the movement of inventories.

Completeness

Cut-off

9 Ensure that inventories and work in progress are properly

categorized, described and disclosed in the financial

statements.

Classification/

Understandability

THE

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