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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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