1. Part 3(B) : Chapter 3
•Trade receivables/payables
•Inventories
2.
3. DEFINITION OF TRADE
RECEIVABLE
• Trade receivable are due from customers for
merchandise sold or services performed in
the ordinary course of business.
4. Purpose of auditing Trade receivable
• 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 division’s revenue
recognition policy and the right of buyers to
return them
• Consider whether the revenue recognition policy
is appropriate.
• Auditor should consider and design audit
procedures that address relevant presentation
and disclosure requirements.
5. DEFINITION OF TRADE PAYABLE
Account payable include liabilities for which
invoices have been received and liabilities for
goods and services received that have not been
matched with the related invoices.
6. Purpose of auditing Trade payable
•To estimate potential losses from open purchase
commitments.
•Understand the significant types of purchase
transaction
7. 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 the
business and industry, analytical procedures,
test of control, direct tests of account balance
8. AUDIT EVIDENCE
Trade Receivable Trade Payable
- General ledger, debtor’s ledger, bank
statement, invoice issued and receipt
book
- Findings:
- Trade receivable balance have been
properly maintained, describe and
disclosed
- General ledger, creditor’s statement,
bank statement, bills and payment
voucher
- Findings:
- Trade payable balance have been
properly maintained, describe and
disclosed
CONFIRMATION
POSITVE CONFIRMATIONS – Debtor
request to reply whether he agrees or not
NEGATIVE CONFIRMATIONS – Request a
reply in the case of disagreement
9. 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 are
recoverable
• TRADE PAYABLE
-To ensure that trade payables are properly
recorded and genuine
10. AUDIT ASSERTIONS TRADE RECEIVABLE
Audit assertions Audit Procedures
Existence
Occurrence
-Obtain an aging listing of trade receivable (debtors)
balances
-Test balances and aging by comparing amounts to sales
invoices and the debtors subsidiary ledgers
Existence
Valuation
-Select samples of trade debtors account for
confirmation 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 review
Valuation -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
11. AUDIT ASSERTIONS TRADE RECEIVABLE
Audit Assertions Audit Procedures
Existence -Check subsequent payments by trade debtors
after year end
Valuation Cut-off -Review credit notes issued subsequent to year-end
and ensure that the credits given are not in
respect of sales transactions for the year under
review
Completeness
Cut-off
-determine whether sales and debtors balances
are recorded correctly and accurately in proper
accounting period
Classification/
understandability
-ensure that trade receivables are properly
disclosed in the financial statements
12. 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 and
reconcile differences that arise
-check subsequent payments by creditors after year end
13. AUDIT ASSERTION TRADE PAYABLE
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
14. 3.4.5 (a) Construct suitable audit
procedures on trade receivable.
Opening balance and
general ledgers agreed
to 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 note
issued 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.
Ensure the trade payables
are properly disclosed in the
F.S
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
Review aging listing for
recoverability of long
outstanding balances and
check payment history of
debtors
Consider write off bad and
doubtful debts by
discussing with client on
their recoverability. Note
cases that are under legal
action.
15. 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 listing
of 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 of
creditor for
confirmation
differences that arise
and check subsequent
payment to creditors
after year end.
17. 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 of
inventories balances as at year end and
ensure that inventories are properly
disclosed in the financial statement.
18. 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
19. 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 as ownership 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.
20. 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 client’s recording of financial statement balances.
Analytical procedures
Phase 1 – performed 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 matters
requiring special consideration later in the engagement.
21. 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
22. 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 listing
inventories
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
23. 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
