Chapter 16: Payable and accrual

The focus on understatement

• The possibility of understatement of liabilities to improve liquidity and profits

• The primary objective of their work will therefore be to as certain whether liabilities existing at the year-end have been completely and accurately recorded.

• Is there a satisfactory cut-off between goods received and invoices received, so that purchases and trade accounts payable are recognised in the correct year?

• Do trade accounts payable represent the bona fide amounts due by the company?

Confirmation of trade payables

The auditor can test trade payables by examining reliable, independent evidence in the form of suppliers' invoices and statements.

Confirmation of trade payables provides evidence primarily for the completeness assertion.

• Entity has strong controls in place to ensure all liabilities are recorded

  • Confirm large balances

    or

• Entity does not have strong controls in place to ensure all liabilities are recorded

  • Confirm large balances

  • Confirm other suppliers with a small or zero balance

  • Confirm a sample of other accounts

• Auditors use a positive confirmation, referred to as a blank or zero-balance confirmation. This confirmation does not state the balance owed but requires the supplier to declare the amount owed at the year-end and to provide a detailed statement of the account. When the confirmation is received back, the amount must be reconciled with the entity's records.

• Differences between the balance confirmed and that on the payables ledger are likely to be for reasons that are similar to those for the receivables confirmation, ie goods in transit, cash in transit, or disputed invoices.

Any differences should be investigated and reconciled.

Other audit procedures: purchases and other expenses

The following are procedures specifically related to the audit of purchases and other expenses:

• Inspect a sample of purchase invoices to ensure they agree to the amount posted to the general ledger.

• Compare expenses making up administrative expenses to the prior year charge and to expectations on a line by line basis. Where differences from expectations are discovered they should be investigated.

• Enquire of management whether there are any unsettled claims or obligations arising before the year end and ensure these are provided for (to give evidence over the completeness of the charge in the related expense category in the statement of profit or loss)

• Recalculate accruals and prepayments to gain evidence that other expenses are not over or understated.

• Compare gross profit margin with the previous year, the gross margin per the budget and expectations. Investigate any unexpected fluctuations.

Other audit procedures: payroll

Other audit procedures that auditors may perform on payroll are as follows:

(a) Reconcile the gross costs on the payroll to the wages cost in the financial statements.

(b) Reperform casts of payroll records to confirm completeness and accuracy of costs used as a basis for the journals to the financial statements.

(c) Confirm payment of net pay per payroll records to cheque or bank transfer summary.

(d) Inspect payroll for unusual items and investigate them further by discussion with

(e) Perform proof-in-total (analytical procedures) on payroll by multiplying estimated average wage (using last year's figures plus expected increases) by average number of employees (therefore incorporating starters and leavers) and compare to figure in draft financial

(f) Reperform calculations of statutory deductions to establish whether valid deductions have been included in the payroll expense

(g) Select a sample of employees from the payroll and recalculate their gross and net pay.

(h) Select a sample of employees from the payroll and agree their pay in the payroll records to personnel records such as employment contracts

(i) Select a sample of employees who have joined or left the organisation during the year. Agree their start/leaving date to supporting documentation such as an employment contract or resignation letter. Ensure that the employee has been added to/removed from the payroll in the correct month. Recalculate the payroll for the month of joining/leaving to ensure its accuracy.

Audit considerations relating ot an entity using a service organisation

• Payroll si sometimes outsourced to a third party organisation

• Do not refer to the service auditor in an unmodified report