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Part 3(B) : Chapter 3

Trade receivables/payables@accrual

Inventories/WIP

Property, plant and equipment(PPE)

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Purpose of auditing Trade receivable Trade receivable are due from customers for merchandise

sold or services performed in the ordinary course ofbusiness.

Purpose:

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 divisions revenue recognition policyand the right of buyers to return them

Consider whether the revenue recognition policy isappropriate.

Auditor should consider and design audit procedures thataddress relevant presentation and disclosure requirements.

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Purpose of auditing Trade payable

Account payable include liabilities for which invoiceshave been received and liabilities for goods and

services received that have not been matched with

the related invoices.

Purpose:

To estimate potential losses from open purchase

commitments.

Understand the significant types of purchasetransaction

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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 thebusiness and industry, analytical procedures,

test of control, direct tests of account balance

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AUDIT EVIDENCETrade Receivable Trade Payable

- General ledger, debtors ledger, bankstatement, invoice issued and receipt

book

- Findings:

- Trade receivable balance have been

properly maintained, describe anddisclosed

- General ledger, creditors statement,bank statement, bills and payment

voucher

- Findings:

- Trade payable balance have been

properly maintained, describe anddisclosed

CONFIRMATION

POSITVE CONFIRMATIONSDebtor

request to reply whether he agrees or not

NEGATIVE CONFIRMATIONSRequest a

reply in the case of disagreement

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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 arerecoverable

TRADE PAYABLE

-To ensure that trade payables are properly

recorded and genuine

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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 andreconcile differences that arise

-check subsequent payments by creditors after year end

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AUDIT ASSERTIONS TRADE RECEIVABLE

Audit assertions Audit Procedures

ExistenceOccurrence

-Obtain an aging listing of trade receivable (debtors)balances

-Test balances and aging by comparing amounts to sales

invoices and the debtors subsidiary ledgers

ExistenceValuation

-Select samples of trade debtors account forconfirmation 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 reviewValuation -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

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Audit Assertions Audit Procedures

Existence -Check subsequent payments by trade debtorsafter year end

Valuation Cut-off -Review credit notes issued subsequent to year-

end and ensure that the credits given are not inrespect of sales transactions for the year under

review

Completeness

Cut-off

-determine whether sales and debtors balances

are recorded correctly and accurately in properaccounting period

Classification/

understandability

-ensure that trade receivables are properly

disclosed in the financial statements

AUDIT ASSERTIONS TRADE RECEIVABLE

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Audit Assertions Audit Procedures

Completeness

Valuation

Rights/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

AUDIT ASSERTION TRADE PAYABLE

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3.4.5 (a) Construct suitable audit

procedures on trade receivable.

Opening balance and

general ledgers agreedto 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 noteissued 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 forrecoverability of long

outstanding balances and

check payment history of

debtors

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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 listingof 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 ofcreditor for

confirmation

differences that arise

and check subsequent

payment to creditors

after year end.

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3.5 Understand the

inventories and work in

progress audit.

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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 ofinventories balances as at year end and

ensure that inventories are properly

disclosed in the financial statement.

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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 A l it bl dit bj ti d

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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 asownership 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.

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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 clients recording of financial statement balances.

Analytical procedures

Phase 1performed 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 mattersrequiring special consideration later in the engagement.

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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

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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 listinginventories

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

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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

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3.6 UNDERSTAND THE PPE

3.6.1 Purpose of auditing the PPE

Comprises assets held for the purpose of providing orproducing goods or services and which are not meant for

sale in the normal course of business.

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3.6.2 Evidence to audit (PPE)

Physical examination

The inspection or count by the auditor of a tangible asset.

If sales invoice has no inherent value, the evidence is calleddocumentation.

Before a cheque is signed, it is a document; after its signed,

it becomes an asset and when it is cancelled, it becomes a

document again.

This evidence is not a sufficient procedure to determine the

ownership of the assets.

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Sources of documents : General Ledgers, PPE listing and relevant

document.

Findings :

a) Additions or a disposal of PPE has a proper authorization for the

purchases.

b) Computations of depreciation agreed with the policy used by the

company.

c) PPE are properly described, classified and disclosed in financialstatements.

d) PPE records have been properly maintained.

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3.6.3. Objectives and assertions on

PPE

Objectives

To ensure that

property, plant andequipment (PPE)are properlyaccounted for that

additions/disposalsare properlyauthorized.

Assertions

Right obligation

Completeness

Accuracy

Valuation

Classification

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3.6.4 Suitable audit test on PPE

Substantive Test

Auditors may performed:

1. Physically examine inventory on the BS date as

evidence accounting record actually exist2. Arrange for supplier confirmation

3. Make inquires of management

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For example :Key areas when testing tangible non-current assets:

Confirmation of ownership,

Inspection of non-current assets, Valuation by third parties,

Adequacy of depreciation rates,

Potential impairment

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3.6.5 Construct suitable audit

procedures on PPE

1. Obtain a copy of the PPE listing which provides

details of the assets

2. Agree opening balances for each category of assets to

last years audit working paper.

3. Vouch additions of PPE to purchase orders, suppliersquotations and invoices, goods received notes to ensure

that proper authorization has been obtained for the

purchases.

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4. Ensure disposals of PPE are properly authorizedand recorded in the books and the proceeds are

properly accounted for

5. Ascertain the depreciation policy and test-checkcalculations to ensure that computations are correct.

6. Examine hire-purchase agreements where

relevant.

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7. Carry out a physical inspection of the material

assets where appropriate

8. Check with client to ensure that PPE are stated at

fair value and if there is any impairment that the

amount is written off to the income statement in the

year of occurrrence.

9. Ensure that PPE are properly described, classified

and disclosed in the financial statements.

10. Casting checked

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