Chapter 3

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Audit & Assurance
  • 1. Part 3(B) : Chapter 3Trade receivables/payablesInventories

2. DEFINITION OF TRADERECEIVABLE Trade receivable are due from customers formerchandise sold or services performed inthe ordinary course of business. 3. Purpose of auditing Trade receivable Obtain understand of accounting policiesrelevant to trade accounts receivable Should know the significant types of saletransactions flowing through the account. Should evaluate the divisions revenuerecognition policy and the right of buyers toreturn them Consider whether the revenue recognition policyis appropriate. Auditor should consider and design auditprocedures that address relevant presentationand disclosure requirements. 4. DEFINITION OF TRADE PAYABLEAccount payable include liabilities for whichinvoices have been received and liabilities forgoods and services received that have not beenmatched with the related invoices. 5. Purpose of auditing Trade payableTo estimate potential losses from open purchasecommitments.Understand the significant types of purchasetransaction 6. AUDIT EVIDENCE FOR TRADERECEIVABLE AND TRADE PAYABLE Used by auditors in arriving at the conclusionson which the audit opinion is based. Source of evidence are knowledge of thebusiness and industry, analytical procedures,test of control, direct tests of account balance 7. AUDIT EVIDENCETrade Receivable Trade Payable- General ledger, debtors ledger, bankstatement, invoice issued and receiptbook- Findings:- Trade receivable balance have beenproperly maintained, describe anddisclosed- General ledger, creditors statement,bank statement, bills and paymentvoucher- Findings:- Trade payable balance have beenproperly maintained, describe anddisclosedCONFIRMATIONPOSITVE CONFIRMATIONS Debtorrequest to reply whether he agrees or notNEGATIVE CONFIRMATIONS Request areply in the case of disagreement 8. AUDIT OBJECTIVES ON TRADE RECEIVABLE ANDTRADE PAYABLE TRADE RECEIVABLE-To ensure that trade receivables areproperly recorded and genuine-To ascertain whether trade receivables arerecoverable TRADE PAYABLE-To ensure that trade payables are properlyrecorded and genuine 9. AUDIT ASSERTIONS TRADE RECEIVABLEAudit assertions Audit ProceduresExistenceOccurrence-Obtain an aging listing of trade receivable (debtors)balances-Test balances and aging by comparing amounts to salesinvoices and the debtors subsidiary ledgersExistenceValuation-Select samples of trade debtors account forconfirmation and reconcile differences that ariseValuationAccuracy-Review aging listing for recoverability of longoutstanding balances and check payment history oftrade debtors for the period under reviewValuation -consider write off of bad and doubtful debts by discusswith client on their recoverability-reclassifying the credit balances to trade payables-Identify & quantify trade debtors accounts with creditbalances at final 10. AUDIT ASSERTIONS TRADE RECEIVABLEAudit Assertions Audit ProceduresExistence -Check subsequent payments by trade debtorsafter year endValuation Cut-off -Review credit notes issued subsequent to year-endand ensure that the credits given are not inrespect of sales transactions for the year underreviewCompletenessCut-off-determine whether sales and debtors balancesare recorded correctly and accurately in properaccounting periodClassification/understandability-ensure that trade receivables are properlydisclosed in the financial statements 11. AUDIT ASSERTION TRADE PAYABLEAudit assertions Audit ProceduresExistenceOccurrence-Obtain an aging listing of trade payables (creditors)balances-Test balances and aging by comparing amounts tosuppliers invoices , statements and creditors ledgersValuation -Identify and quantify trade creditors accounts withdebit balances at year end and consider reclassifyingthe debit balances to trade receivablesExistence -Select samples of trade creditors for confirmation andreconcile differences that arise-check subsequent payments by creditors after year end 12. AUDIT ASSERTION TRADE PAYABLEAudit Assertions Audit ProceduresCompletenessValuationRights/obligationsCut-off-review suppliers invoices, credit notes and debitnotes received after year end for omission ofliabilities or over-statement of purchases, whererelevantCompleteness -Carry out a year end cut-off test to determinewhether purchases and creditors balances arerecorded correctly and accurately in the properaccounting periodClassification/understandability-Ensure that trade payables are properly disclosedin the financial statements 13. 3.4.5 (a) Construct suitable auditprocedures on trade receivable.Opening balance andgeneral ledgers agreedto last year tradereceivable.Identify and quantify tradedebtors account withcredit balances at year endand consider reclassifiyingthe credit balances.Obtain an aging listing ofdebtors balance and testbalances aging by comparingamount to sales invoices, andthe debtors subsidiary ledgers.Review credit noteissued subsequent toyear end and ensurethat the credits givenare not in respectSelect sample of debtorsfor confirmationdifferences that arise andcheck subsequent paymentto creditors after year end.Ensure the trade payablesare properly disclosed in theF.SCarry out a year end cut-offtest to determinewhether sales anddebtors balances arerecorded correctly andaccuratedly in the properaccounting periodReview aging listing forrecoverability of longoutstanding balances andcheck payment history ofdebtorsConsider write off bad anddoubtful debts bydiscussing with client ontheir recoverability. Notecases that are under legalaction. 14. 3.4.5 (b) Construct suitable auditprocedures on trade payables.Opening balance andgeneral ledgers agreedto last year tradepayablesIdentify and quantifytrade creditors accountwith debit balances atyear end and considerreclassifiying the debitbalances.Carry out a year end cut-offtest to determinewhether purchases andcreditors balances arecorrectly andaccuratedly in theproper accountingperiodObtain an aging listingof creditors balanceand test balances agingby comparing amountto suppliers invoices,statements andcreditors ledgersReview suppliers invoice,credit note and debitnote received after yearommision of liabilitiesEnsure the tradepayables are properlydisclosed in the F.SSelect sample ofcreditor forconfirmationdifferences that ariseand check subsequentpayment to creditorsafter year end. 15. 3.5 Understand theinventories and work inprogress audit. 16. 3.5.1 Explain the purpose of auditing theinventories and work in progress. To ensure that inventories and work inprogress are stated at the lower of costand net realisable value. To ensure that the basis of valuation forinventories is properly and consistentlyapplied. To ascertain physical existence ofinventories balances as at year end andensure that inventories are properlydisclosed in the financial statement. 17. 3.5.2 Select an evidence to audit theinventories and work in progress. Stock listing / stock card General leger sale invoice Debit / credit note 18. 3.5.3 Apply suitable audit objective andassertions on inventories and work inprogress.Audit objective : to obtain evidence as to the existence aswell as ownership and valuation of the inventory.Audit assertions Specific assertionExistence Inventory of the company exist at a given date,and recorded transactions have occurredduring a given period.Completeness cut-off Inventory should be presented in the financialstatements are so included.Accuracy Check the state of valuation of inventory inFIFOrealizable value Inventory have been included in the financialstatements at appropriate amounts. 19. 3.5.4 Audit test to be used when auditing theinventories and WIP Substantive test are those activities performed by auditors toevaluate and verify the correctness of monetary amounts inregards to the clients recording of financial statement balances. Analytical proceduresPhase 1 performed during the planning phase to assist indetermining the nature, extent and timing of audit work to beperformed. It will help auditor to identify significant mattersrequiring special consideration later in the engagement. 20. 3.5.5 INVENTORIES/WIPNo Audit procedures Auditassertion1 Arrange with client to attend physical court ofinventories, if the inventory balance is material (seephysical court instructions)Existence2 Obtain an aging listing of inventories as at year end,showing quantities and valuation. Check againstinventory cards/ledgers and ensure correct casting.ExistenceAccuracy3 Check the bases of valuation of inventories ;ie, FIFO,standard cost, average cost, etc, for raw materials,work in progress (WIP) and finished goods.ValuationAccuracy 21. No Audit Procedures Audit assertion4 Where standard casting is used, review thevariance a/c to ascertain the reasons for unusualvariances.Valuation5 Review write-down for obsolete, slow-moving anddamaged inventories, based on physical courtobservations and from review of the aging listinginventoriesValuation6 Check reconciliation of inventory control a/c withinventory subsidiary a/c at the date of physical count andat year end, ensuring differences between the physicalquantities and the book balances have been properlyaccounted for.ExistenceValuation 22. No Audit Procedures Audit assertion7 Carry out a net realizable value (NRV) test to ensure thatinventories are stated at the lower of cost or NRV fair value.Valuation8 Perform a cut-off test for purchases and sales by reviewingpurchase orders, goods received notes, sales invoices, debitnotes, credit notes and other relevant documents whichcontrol the movement of inventories.CompletenessCut-off9 Ensure that inventories and work in progress are properlycategorized, described and disclosed in the financialstatements.Classification/Understandability 23. THE END^_^

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