audit

1. GROUP 6
CHAPTER 3 (4) :
UNDERSTAND THE AUDITING AT TRADE
RECEIVABLES AND PAYABLES
PREPARED BY :
MOO ZIOW CHENG 06DAT10F1004
RATNA DEWI A/P PALANIAPPAN
06DAT10F1024
YONG YUE LING 06DAT10F1022
YEO SHU CHIN 06DAT10F1006

2. PURPOSE OF AUDITING TRADE
RECEIVABLE
 Trade receivables are due from customers for
merchandise sold or services performed in the
ordinary course of business. Trade receivables
may either be accounts receivable or notes
receivable.
 Nontrade receivables come into being from
other types of transactions and may he written
promises to pay monies or deliver services.
Examples are advances to employees, claims
against other entities (i.e., tax refunds,
insurance receipts), deposits, and financial
receivables (i.e., interest receivable, dividend
receivable).

3.  The auditor should obtain an understanding of
the accounting policies relevant to trade
accounts receivable, the significant types of
sales transactions and the monetary volume of
transactions flowing through the account. The
auditor should evaluate the division's revenue
recognition policy and, if buyers of some or all of
the division's products have the right to return
them, consider whether the revenue recognition
policy is appropriate. When preparing this
program the auditor should consider and design
audit procedures that address relevant
presentation and disclosure requirements.

4.  Trade creditors in many countries routinely provide
their debtors with a monthly statement showing
the invoices outstanding. Some businesses
routinely reconcile their own records to statements
provided by their suppliers.
 This means that direct confirmation of creditor
balances is not always necessary, as documentary,
third party evidence, confirming the balance
already exists.

5.  Auditors are likely to assess receivables as being subject to
the risk of overstatement, and payables as subject to the
risk of understatement and this affects the populations
from which samples are drawn.
 Recorded receivables (i.e. the sales ledger), are
scrutinised to establish whether there is any need for
writing down through the bad debt provision, auditors are
less likely to be concerned with unrecorded receivables.
Recorded payables on the other hand, may be incomplete
and the auditor will tend to look outside the entity for
evidence of unrecorded liabilities.

6. purpose of auditing trade payables
 Accounts payable is money owed by a business to
its suppliers and shown on its Balance Sheet as a
liability. An accounts payable is recorded in the
Account Payable sub-ledger at the time an invoice
is vouchered for payment. Vouchered, or
vouched, means that an invoice is approved for
payment and has been recorded in the General
Ledger or AP sub ledger as an outstanding, or
open, liability because it has not been paid.

7.  Accounts 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.
Completeness and cutoff are generally high-risk
objectives, and existence is generally a low-risk
objective for accounts payable. The valuation
objective does not apply to trade accounts
payable; however, when appropriate, the auditor
should estimate potential losses from open
purchase commitments.

8.  The auditor should obtain an understanding of the
significant types of purchase transactions and the
monetary volume of transactions flowing through the
account. Particular consideration should be given to the
consistent and appropriate accounting treatment of special
transactions such as volume rebates from suppliers,
interest on overdue liabilities, balances not due within 12
months and purchase transactions subject to reservation
of title.
 When appropriate, substantive tests should be developed
for these types of transactions to provide the necessary
assurance about each relevant audit objective. When
preparing this program the auditor should consider and
design audit procedures that address relevant
presentation and disclosure requirements.

9. Define the evidence to audit trade
receivables and trade payables
 Audit evidence is all the information used by auditors
in arriving at the conclusions on which the audit
opinion is based. The basic sources of evidence are
knowledge of the business and industry, analytical
procedures, tests of controls, and direct tests of
account balances and transactions.
 Direct confirmation provides evidence as to
existence and accuracy, but not as to collectibility, or
unrecorded balances. Indirectly, it confirms the
accuracy of cut-off and may draw attention to
irregularities such as teeming and lading and window
dressing. It gives comfort on the proper operation of
controls in the area.

10.  A combination of positive and negative confirmations can
be used where there is a small number of large balances
which can be confirmed positively, and a large number
of small balances which can be confirmed negatively.
 Direct confirmation constitutes good quality, third party,
documentary evidence, however, debtors may agree
with a balance without checking it, and they may also
agree with a balance that is understated.
 Positive confirmations, where the debtor is requested to
reply whether he agrees or not, are more reliable than
negative confirmations, which only request a reply in the
case of disagreement

11.  Direct confirmation is a time consuming process and the
response rate is often very low. Any audit procedure
involving the use of sampling is subject to sampling risk,
and where confirmations are carried out at a date other
than the period-end, the intervening period must be
audited.
 Direct confirmations require the co-operation of
management but must be controlled by the auditor.
There is scope for fraudulent responses to requests for
direct confirmation, in the absence of proper control.

12. Apply suitable audit objectives
and assertions on trade
receivables and trade payables
 Main audit objectives for (i) trada payables and (ii)
trade receivables
 Assertions
(I) trade payables and (ii) trade receivables objectives
 Existence • :Recorded sales transactions represent
goods shipped during the period • Recorded cash
receipts transactions represent cash received
during the period • Recorded sales adjustment
transactions represent authorized discounts, returns
and allowances, and bad debts applicable to the
period Accounts receivable represent amounts owed
by customers at the balance sheet date

13. Ownership :•
 The entity has rights to the accounts receivables
and cash resulting from recorded sale transactions
Accounts receivables at the balance sheet date
represent legal claims of the entity on customers
for payment.
Completeness:
 • All sales, cash receipts and sales adjustment
transactions occurred during the period have been
recorded • Accounts receivables includes all
claims on customers at the balance sheet date.

14.  Valuation
 • All sales, cash receipts and sale adjustment transactions
are correctly journalized, summarized and posted •
Accounts receivable represent gross claims on customers
at the balance sheet date and agree with the sum of the
accounts receivable subsidiary ledger The provision for
bad debts represents a reasonable estimate of the
difference between gross accounts receivable and their net
realizable value
 Disclosure •
 The details of sales, cash receipts and adjustment
transactions support their presentation in the financial
report, including their classification and related disclosures
• Accounts receivable are properly identified and classified
in the balance sheet Appropriate disclosures have been
made concerning accounts receivable that have been
factored or otherwise assigned.

15.  Management is responsible for the fair
presentation of financial statements that reflect
the nature and operations of the entity.
 Assertions used by the auditor fall into the
following categories:
 a. Assertions about classes of transactions and
events for the period under audit:
 i. Occurrence. Transactions and events that have
been recorded have occurred and pertain to the
entity.
 ii. Completeness. All transactions and events that
should have been recorded have been recorded.
 iii. Accuracy. Amounts and other data relating to
recorded transactions and events have been
recorded appropriately.
 iv. Cutoff. Transactions and events have been
recorded in the correct accounting period.

16.  v. Classification. Transactions and events have been
recorded in the
 proper accounts.
 b. Assertions about account balances at the period end:
 i. Existence. Assets, liabilities, and equity interests exist.
 ii. Rights and obligations. The entity holds or controls
the rights to
 assets, and liabilities are the obligations of the entity.
 iii. Completeness. All assets, liabilities, and equity
interests that
 should have been recorded have been recorded.

17.  c. Assertions about presentation and disclosure:
 i. Occurrence and rights and obligations. Disclosed
events and transactions have occurred and pertain to
the entity.
 ii. Completeness. All disclosures that should have been
included in the financial statements have been included.
 iii. Classification and understandability. Financial
information is appropriatel presented and described and
disclosures are clearl expressed.
 iv. Accuracy and valuation. Financial and other
information are disclosed fairly and at appropriate
amounts.

18.  The auditor should use relevant assertions
for classes of transactions, account
balances, and presentation and disclosures
in sufficient detail to form a basis for the
assessment of risks of material
misstatement and the design and
performance of further audit procedures.
The auditor should use relevant assertions
in assessing risks by considering the
different types of potential misstatements
that may occur, and then designing further
audit procedures that are responsive to the
assessed risks.

19.  Relevant assertions are assertions that have a g
meaningful bearing on whether the account is fairly
stated. For example, valuation may not be relevant to
the cash account unless currency translation is
involved; however, existence and completeness are
always relevant. Similarly, valuation may not be
relevant to the gross amount of the accounts
receivable balance but is relevant to the related
allowance accounts. Additionally, the auditor might,
in some circumstances, focus on the presentation
and disclosure assertion separately in connection
with the period-end financial reporting process.

20.  The auditor may use the relevant assertions as they
are described above or may express them differently
provided aspects described above have been
covered. For example, the auditor may choose to
combine the assertions about transactions and
events with the assertions about account balances.
As another example, there may not be a separate
assertion related to cut-off of transactions and
events when the occurrence and completeness
assertions include appropriate consideration of
recording transactions in the correct accounting
period.

21. suitable audit test to be used when
auditing the trade receivables and
trade payables
 Substantive tests provide evidence about management's
assertions and the corresponding audit objectives. In the
substantive testing phase, the auditor obtains,
evaluates, and documents evidence to corroborate
management's assertions embodied in the accounts and
other information in the financial statements and related
notes. The auditor's purpose in performing substantive
tests is to determine whether the audit objectives have
been achieved. Substantive procedures include tests of
details of account balances and transactions, and
analytical comparisons and other procedures..

22.  The nature of substantive tests, when they are
performed, and the extents to which they are
performed depend on the auditor's materiality
judgments and risk assessments. Furthermore, the
assurance required from substantive tests may be
obtained from tests of details, analytical
procedures, or some combination of both, with the
assurance obtained from one reducing the assurance
needed from the other.
 Substantive tests may also provide evidence about
the control structure such as when a misstatement
discovered through a substantive test is, upon further
investigation, found to have resulted from deficiency
in the control structure. In that situation, the auditor
may have to reassess his or her prior conclusions
about the control structure

23. Suitable audit procedures on trade
receivables and trade payables
Accounts Payable Audit Procedures
 Accounts payable is a critical portion of your
financial records and can be subject to fraud without
careful reconciliation and oversight. Strong accounts
payable audit procedures can ensure the accuracy
and timeliness of your bill payments. The best
accounts payable audit procedures allow a mixture of
daily checks, routine internal controls and external
audit procedures.

24.  Routine Procedures
 Accounts payable should be balanced daily to reconcile
payments to recorded entries. Any discrepancy between
the total amount paid and the total recorded should be
examined and reconciled immediately. Management
oversight of every individual involved in accounts
payable should be stringent and should include routine
monitoring of activities. Managers should be trained to
watch for any signs of misconduct by accounts payable
staff.
 Sign-off procedures that help establish an audit trail
should be enacted. These sign-offs should include
management review of daily reconciliations, monthly
discrepancy reports and individual sign-offs for large
transactions to ensure that all information is correct.

25.  Internal Controls
 Internal controls for accounts payable should include signature
requirements according to payment amounts. Consider
implementing several tiers of signature requirements. For example,
you could require an accounting manager's signature for items of
more than $5,000, an executive sign-off for items of more than
$10,000 and dual signature requirement for payments of more than
$25,000. Match your signature requirements to your revenue totals
and the susceptibility of your business to fraud for maximum
benefit.
 Establish routine control procedures for accounts payable. Include
spot checks on individual payments to ensure accuracy. For
example, review five payables every day and check the payment
amount and payee information and ensure that accounting records
have been completed correctly.
 During book closing procedures at the end of a month or financial
period, include sign-off procedures for all account payable work
including summary totals and account reconciliations. Additionally,
keep a running report that monitors payment levels from accounts
payable processing. If payment levels suddenly increase or
decrease, an automatic investigation into the causes can head off
potential problems.

26.  External Audits
 Most external audits include accounts payable as a testing
area. External audits should take a detailed accounts
payable listing and trace totals from the details through all
accounting records to the summary total and should include
the bank withdrawals. Select items should be chosen for in-
depth testing. Select payees should be contacted to verify
receipt of payments. Additionally, routine reconciliations
should be reviewed for accuracy and logical processing. Any
reconciliations with large discrepancies should be
investigated completely.
 External audits should test for unrecorded liabilities.
Consider selecting all invoices over a specified threshold and
a random selection of routine invoices for in-depth review.
Look at disbursement records, credits for returns, goods
received but not invoiced, and any invoice-specific accounts.
Ensure that every invoice is recorded properly in the correct
time period. Review the account for to see if it was recorded
as a liability or if it was properly excluded from the time
period.

27. Substantive Audit Procedures
for Accounts Receivable
 Audits are internal and external reviews of a
company’s financial information. Companies use
audits to ensure its financial information is accurate
and represents the true nature of the company’s
financial transactions. Accounts receivable
represents the money owed to the company by client
and consumers. Auditors use substantive audit
procedures to test the balances of accounts
receivable accounts. Substantive audit procedures
are direct tests using specific information from the
company’s accounting system and financial
statements

28.  Reviewing Accounts Receivable Process
 The first step in auditing a company’s accounts
receivable process is scouring out the originating
information. Auditors usually pull a sample of clients
or customers from the company’s account
receivables ledger and review the originating
information that resulted in the current balance. This
is an important step because companies can easily
create fraudulent accounting balances by simply
adding fake clients and receivables balance to
bolster its financial statement. Reviewing the original
sales information will prove to the auditors that a
sales on account actually occurred, resulting in the
accounts receivable balance.

29.  Interview Accounting Employees
 Auditors will usually interview the employees who
handle customer accounts to determine how well the
company operates. Accounting employees may be
required to math check the receivables information
and ensure that sufficient backup is included with the
customer’s paperwork. Interviewing these employees
can also help auditors determine how much training
is involved in the accounts receivable process. A lack
of employee training may indicate the potential for
errors to occur in the accounts receivable process.

30.  Verifying Balances with Clients
 Another important audit procedure is contacting the
company’s major clients and requesting the client to
verify their accounts payable amounts owed to the
company. Auditors will take this external information
and match it to the company’s internal information.
Variations in the dollar amounts will result in further
tests or more information needing to be provided by
the company to determine why the variation
occurred. Auditors will usually review information for
several months of the accounts receivable account to
determine how well the company operates over an
extended period of time.

31.  Tracking the Payoff Process
 Testing the payoff process for accounts receivable is
another important part of the auditing process.
Auditors will review when the company was paid for
goods and services and how long it took the company
to apply the money received to the open accounts
receivable balance. Variation between the amount
paid and the amount owed will also need to be
justified by the company. Auditors may need to
review the company’s bank statements to completely
source the depositing of the check from the client.

32. THANK YOU