Trang 2 1 SOURCES OF EVIDENCE 1.1 Trade payables and accrued expenses 1.1.1 Distinction ¾ Both are liabilities to pay for goods/services received, however: trade payables have been in
SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS OVERVIEW Objective ¾ To describe practical methods used to collect audit evidence SOURCES OF EVIDENCE RISKS C A ¾ ¾ Trade payable & accrued expense Provisions ¾ ¾ Trade payable & accrued expense Provisions P E R IAS 37 ¾ ¾ ¾ Provisions Contingencies Litigation ¾ RECONCILIATIONS ¾ ¾ Control a/c Individual supplier’s a/c “Cutoff” A comprehensive audit program for payables, accrued expenses and provisions is set out in Appendix 2601 SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS SOURCES OF EVIDENCE 1.1 Trade payables and accrued expenses 1.1.1 Distinction ¾ Both are liabilities to pay for goods/services received, however: ¾ 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 Complete the following ideas list for trade accounts payable and accrued expenses Solution 1.1.2 “Ideas list” 1.1.3 ¾ Accounting systems ⇒ ¾ Documentation ⇒ ¾ Tangible assets ⇒ ¾ Management and employees ⇒ ¾ Customers and suppliers ⇒ ¾ Other third parties ⇒ ¾ Analytical procedures ⇒ 1.2 Provisions 1.2.1 Definition Examples 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 is probable (c) A reliable estimate of the amount can be made 2602 SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS RISKS 2.1 Trade payables and accrued expenses ¾ Liabilities incurred may be unrecorded (e.g purchase invoices not processed) Financial statements not reflect extent of liability and expenditure is understated ¾ Secured liabilities may not be identified and security may not be disclosed ¾ Accrued expenses (e.g for goods/services received but not invoiced) relating to current year expenditure may be omitted ¾ Liabilities may be recorded/payments to suppliers made for goods not received (due to error or fraud) 2.2 Provisions ¾ Liability may be excessive (i.e overstated) – due to uncertainty in estimating amount ¾ Classification as current or non-current may be inappropriate – due to uncertainty of timing ¾ Liability may be overstated if a provision is not reversed when its settlement is no longer probable RECONCILIATIONS A comprehensive audit program for trade payables and accrued expenses is set out in Appendix 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 Balance b/f (opening trade payables) x Purchases (credit) a/c (PDB) x Trade receivables ledger contra (journal) x Balance c/f (closing trade payables) x x x Balance c/f x 2603 SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS 3.1.2 Reconciliation ¾ To check the accuracy of client’s postings of individual transactions to individual suppliers’ a/cs and totals to the payables (ledger) control a/c ¾ Procedure as for trade accounts receivable 3.2 Suppliers’ statement reconciliations ¾ Unlike accounts receivable, good quality third party evidence in the form of suppliers’ statements may exist These are the suppliers’ trade account receivable, sent to their customers to prompt payment ¾ The main audit procedure for the verification of trade payables and accrued expenses is the examination of suppliers’ statement reconciliations It is essential that reconciling items are properly accounted for ¾ A limitation of this procedure is that the customer may not receive or keep statements from all suppliers Additional steps will then be necessary to confirm existence and completeness 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 Describe how would you confirm the following items on a reconciliation of a balance per a supplier’s statement to the balance per the payables ledger a/c (Assume suppliers’ statement and ledger a/c balances both as at the end of the reporting period.) Solution 3.2.1 ¾ Reconciling item Purchase invoices on supplier’s statement not included in ledger a/c balance 3.2.2 − − − ¾ Cash payments in payables’ ledger a/c not on supplier’s statement 2604 − − How verified SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS 3.3 Cut-off 3.3.1 Purchases and payments ¾ 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 ¾ The source document for checking the accuracy of cutoff it the goods received note (GRN) ¾ Goods received before the end of the reporting period (i.e included in inventory as at the end of the reporting period) must be included in purchases for the year and trade payables (or goods received not invoiced accrual) ¾ Goods received after the end of the reporting period (i.e excluded from end of the reporting period inventory) must be included in purchases for the next year and not included in trade payables at the end of the reporting period IAS 37 PROVISIONS 4.1 Provisions ¾ See section 1.2 above for definitions and recognition criteria 4.1.1 ¾ Amounts ¾ carrying amount at beginning and end of period additions and increases amounts used (i.e incurred and charged) unused amounts reversed Narrative ¾ Disclosure 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 be disclosed But general nature of dispute and reason for not disclosing info should be disclosed 2605 SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS 4.2 Contingent liabilities and contingent assets 4.2.1 Definitions [IAS 37] ¾ Contingent liability (a) A possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) A present obligation arising from past events (an “obligating event”) which is not recognised because: (i) an outflow of resources is not probable; or (ii) it cannot be measured with sufficient reliability ¾ Contingent asset – A possible asset arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events ¾ Uncertainty – Can be expressed by a range of outcomes Quantified probabilities 4.2.2 Suggest a level of precision that is unlikely to be supported by available info General description Using terms ranging from “probable” to “remote” 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 ¾ Nature of the contingent liability/asset ¾ Estimate of financial effect (where practicable) ¾ Uncertain factors affecting amount or timing 2606 SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS 4.3 Litigation and claims 4.3.1 Procedures [ISA 501] ¾ Make inquiries of management and obtain representations ¾ Review board minutes and correspondence with entity’s lawyers ¾ Examine legal expense accounts ¾ Use information obtained from discussions with any in-house legal department ¾ Seek direct communication with the entity’s lawyers Letter prepared by management and sent by auditor, requests the lawyer to communicate directly with the auditor Ordinarily specifies − − Requests lawyer to − − ¾ confirm reasonableness of management’s assessments provide further information if the list is incomplete/incorrect In certain circumstances meet lawyer to discuss the likely outcome of litigation and claims 4.3.2 ¾ a list of litigation and claims management’s assessment of the outcome and estimate of financial implications, including costs involved Permission to communicate refused Scope limitation ⇒ a qualified opinion or a disclaimer of opinion (see later session) FOCUS You should now be able to: ¾ distinguish between: trade payables and accrued expenses; provisions per IAS 37 and allowances against asset values; ¾ identify risks of misstatements and sources of evidence; ¾ select appropriate audit procedures (including verification of suppliers’ statement reconciliations) for inclusion in a work program (see also Appendix 3) relating to financial statement assertions concerning trade payables and accruals; ¾ recognise and account for contingent liabilities and contingent assets in accordance with IAS 37 2607 SESSION 26 – TRADE PAYABLES, ACCRUED EXPENSES AND PROVISIONS EXAMPLE SOLUTION Solution — Sources of evidence ¾ Accounting systems ⇒ e.g PDB = book of prime entry ¾ Documentation ⇒ Purchase requisitions/orders/invoices/GRNs, cheque payments ¾ Tangible assets ⇒ Inventories (raw materials, goods for resale) ¾ Management and employees ⇒ Buyer, purchase ledger supervisor/clerks, chief cashier ¾ Customers and suppliers ⇒ Suppliers (provide monthly statements?) ¾ Other third parties ⇒ Intermediaries (e.g warehousing agents) ¾ Analytical procedures ⇒ Payable days outstanding, current ratio, accrued expenses to trade payables % or ratio Solution — Supplier’s statement reconciliation ¾ ¾ Purchase invoices on supplier’s statement not included in ledger a/c balance Cash payments in payables’ ledger a/c not on supplier’s statement 2608 ¾ If accrued by client, inspect GRN (should be cross-referenced) and confirm dated before the end of the reporting period ¾ If not accrued by client, confirm GRN dated after the end of the reporting period ¾ Confirm any other reason for non-inclusion (e.g if client wrongly invoiced should be supplier’s credit note on a statement after the end of the reporting period) ¾ I.e “cash-in-transit” – cheque should be raised in the cash book shortly before the end of the reporting period and clear bank shortly afterwards ¾ Confirm payment on next month’s supplier’s statement