F8 AA (Int)Session26_j08.pdf

7/23/2019 F8 AA (Int)Session26_j08.pdf

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SESSION 26 TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS

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OVERVIEW

Objective

To describe practical methods used to collect audit evidence.

RISKS

SOURCES OF

EVIDENCE

C A P E R

Trade payable & accrued expense

Provisions

RECONCILIATIONS

Provisions

Contingencies Litigation

Control a/c

Individual suppliers a/c

Cutoff

Trade payable & accrued expense Provisions

IAS 37

A comprehensive audit program for payables, accrued expenses and provisions is set out inAppendix 3.


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1 SOURCES OF EVIDENCE

1.1 Trade payables and accrued expenses

1.1.1 Distinction

Both are liabilities to pay for goods/services received, however:

trade payables have been invoiced or formally agreed with suppliers accrued expenses have not.

Accruals are often reported as part of trade and other payables.

Example 1

Complete the following ideas list for trade accounts payable and accruedexpenses.

Solution

1.1.2 Ideas list 1.1.3 Examples

Accounting systems

Documentation

Tangible assets

Management and employees

Customers and suppliers

Other third parties

Analytical procedures

1.2 Provisions

1.2.1 Definition

Liabilities of uncertain timing or amount.

1.2.2 Recognition criteria [IAS 37]

(a) A present obligation (legal or constructive) as a result of a past event(b) An outflow of resources to settle the obligation isprobable(c) A reliable estimateof the amount can be made.


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2 RISKS

2.1 Trade payables and accrued expenses

Liabilities incurred may be unrecorded (e.g. purchase invoices not processed). Financial

statements do not reflect extent of liability and expenditure is understated.

Secured liabilities may not be identified and security may not be disclosed.

Accrued expenses (e.g. for goods/services received but not invoiced) relating to currentyear expenditure may be omitted.

Liabilities may be recorded/payments to suppliers made for goods not received (due toerror or fraud).

2.2 Provisions

Liability may be excessive (i.e. overstated) due to uncertainty in estimating amount.

Classification as current or non-current may be inappropriate due to uncertainty oftiming.

Liability may be overstated if a provision is not reversed when its settlement is nolonger probable.

3 RECONCILIATIONS

A comprehensive audit program for trade payables and accrued expenses is setout inAppendix 3.

3.1 Control account reconciliation

3.1.1 Proforma control a/c

Trade payables ledger control a/c

$

Cash a/c (cash book) x

Discounts received a/c (CB) x

Purchase returns a/c(purchase returns day book) x

Trade receivables ledger contra(journal) x

Balance c/f(closing trade payables) x

__

x__

$Balance b/f

(opening trade payables) x

Purchases (credit) a/c(PDB) x

__

x

__Balance c/f x


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3.1.2 Reconciliation

To check the accuracy of clients postings of individual transactions to individualsuppliers a/cs and totals to the payables (ledger) control a/c.

Procedure as for trade accounts receivable.

3.2 Suppliers statement reconciliations

Unlike accounts receivable, good quality third party evidence in the form of suppliersstatements may exist. These are the suppliers trade account receivable, sent to theircustomers to prompt payment.

The main audit procedure for the verification of trade payables and accrued expenses isthe examination of suppliers statement reconciliations. It is essential that reconcilingitems are properly accounted for.

A limitation of this procedure is that the customer may not receive or keep statementsfrom all suppliers. Additional steps will then be necessary to confirm existence andcompleteness of amounts payable, including:

direct confirmation (i.e. requesting that the supplier provide a statement); cutoff tests on goods received; and examination of post year-end payments and invoices.

Example 2

Describe how would you confirm the following items on a reconciliation of abalance per a suppliers statement to the balance per the payables ledger a/c.(Assume suppliers statement and ledger a/c balances both as at the end of thereporting period.)

Solution

3.2.1 Reconciling item 3.2.2 How verified

Purchase invoices on suppliers

statement not included in ledgera/c balance

Cash payments in payablesledger a/c not on suppliersstatement


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3.3 Cut-off

3.3.1 Purchases and payments

Individual suppliers statement reconciliations identify items (see above) which are

checked to ensure that cutoff between purchases/payables and cash is correct.

3.3.2 Purchases and inventory

The source document for checking the accuracy of cutoff it the goods received note(GRN).

Goods received before the end of the reporting period (i.e. included in inventory as atthe end of the reporting period) must be included in purchases for the year and tradepayables (or goods received not invoiced accrual)

Goods received after the end of the reporting period (i.e. excluded from end of thereporting period inventory) must be included in purchases for the next year and notincluded in trade payables at the end of the reporting period.

4 IAS 37 PROVISIONS

4.1 Provisions

See section 1.2 above for definitions and recognition criteria.

4.1.1 Disclosure

Amounts

carrying amount at beginning and end of period additions and increases amounts used (i.e. incurred and charged) unused amounts reversed

Narrative

nature of obligation and expected timing of outflows uncertainties about amount or timing (and major assumptions made).

In extremely rare cases, when information may be seriously prejudicial, it need not bedisclosed. But general nature of dispute and reason for not disclosing info should bedisclosed.


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4.2 Contingent liabilities and contingent assets

4.2.1 Definitions [IAS 37]

Contingent liability

(a) Apossible obligationarising frompast events whose existencewill be confirmed only bythe occurrence or non-occurrenceof one or more uncertain future eventsnot whollywithin the control of the enterprise; or

(b) Apresent obligationarising frompast events (an obligating event) which is notrecognisedbecause:

(i) an outflow of resources is not probable; or(ii) it cannot be measuredwith sufficient reliability.

Contingent asset A possible asset arising from past events whose existence will beconfirmed only by the occurrence or non-occurrence of one or more uncertain futureevents

Uncertainty Can be expressed by a range of outcomes.

Quantified probabilities General description

Suggest a level of precision that

is unlikely to be supported byavailable info

Using terms ranging from

probable to remote

4.2.2 Accounting treatment [IAS 37] Summary

Flow of resources Obligation Asset

Remote No disclosure No disclosure

Probably not/ Possible Contingent liability disclosure No disclosure

Probable Provision (if reliable estimate) otherwise a contingent liability

Disclosure required

Expected/ virtually certain Provision Asset (not contingent)

4.2.3 Disclosure

Nature of the contingent liability/asset

Estimate of financial effect (where practicable)

Uncertain factors affecting amount or timing


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4.3 Litigation and claims

4.3.1 Procedures [ISA 501]

Make inquiries of management and obtain representations.

Review board minutes and correspondence with entitys lawyers.

Examine legal expense accounts.

Use information obtained from discussions with any in-house legal department.

Seek direct communication with the entitys lawyers.

Letter prepared by management and sent by auditor, requests the lawyer tocommunicate directly with the auditor.

Ordinarily specifies

a list of litigation and claims

managements assessment of the outcome and estimate of financialimplications, including costs involved.

Requests lawyer to

confirm reasonableness of managements assessments

provide further information if the list is incomplete/incorrect.

In certain circumstances meet lawyer to discuss the likely outcome oflitigation and claims.

4.3.2 Permission to communicate refused

Scope limitationa qualified opinion or a disclaimer of opinion (see later session).

FOCUS

You should now be able to:

distinguish between:

trade payables and accrued expenses; provisions per IAS 37 and allowances against asset values;

identify risks of misstatements and sources of evidence;

select appropriate audit procedures (including verification of suppliers statementreconciliations) for inclusion in a work program (see alsoAppendix 3) relating to financialstatement assertions concerning trade payables and accruals;

recognise and account for contingent liabilities and contingent assets in accordance withIAS 37.


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EXAMPLE SOLUTION

Solution 1 Sources of evidence

Accounting systems e.g. PDB = book of prime entry

Documentation Purchaserequisitions/orders/invoices/GRNs, cheque

payments

Tangible assets Inventories (raw materials, goods for resale)

Management and employees Buyer, purchase ledger supervisor/clerks,chief cashier

Customers and suppliers Suppliers (provide monthly statements?)

Other third parties Intermediaries (e.g. warehousing agents)

Analytical procedures Payable days outstanding, current ratio,accrued expenses to trade payables % or ratio

Solution 2 Suppliers statement reconciliation

Purchase invoices on suppliersstatement not included in ledgera/c balance

If accrued by client, inspect GRN (should becross-referenced) and confirm dated before theend of the reporting period

If not accrued by client, confirm GRN datedafter the end of the reporting period

Confirm any other reason for non-inclusion(e.g. if client wrongly invoiced should besuppliers credit note on a statement after theend of the reporting period)

Cash payments in payablesledger a/c not on suppliersstatement

I.e. cash-in-transit cheque should be raisedin the cash book shortly before the end of thereporting period and clear bank shortlyafterwards

Confirm payment on next months suppliersstatement

Documents

F8 AA (Int)Session26_j08.pdf