Audit of Payables

Introduction

• The audit of payables is almost the reverse of the audit of receivables, but with important differences.
• Receivables: Concerned with not overstating their value, ensuring amounts due from customers are collectible.
• Payables: Concerned with not understating their value, ensuring all liabilities are recorded.

Key Audit Processes

Reconciliation

• Reconcile detailed balances in the ledger to the control account (total creditors figure).
• Ensure the total figure in financial statements is correctly composed of individual payables balances.

Supplier Correspondence

• Examine correspondence with suppliers for issues such as disputes over product quality or payment confirmations.
• Significant issues (e.g., large shipments of inferior quality) should be escalated to the board for policy decisions.

Analytical Procedures

• Comparing the balance to the previous year and investigating any significant differences;
• Calculating the payable days ratio and comparing to the previous year;
• Identifying the trade payables balance for each month and comparing the level of payables to the expected trend of the company; and
• Inspecting the aged payable analysis, in particular, identifying the old and slow moving balances and investigating these with the client.
• Payables Period: Consistency in payables period (e.g., 40 days) can indicate correct accounting.
  • Sudden changes in payables period should be investigated (e.g., decrease might suggest missing payables).

Statement Reconciliation

• Third-party written confirmations from suppliers about what they think is owed.
• Common in some countries, can substitute for payables circularisation.
• Not as reliable as circularisation since documents go to clients first.

Payables Circularisation

• Similar to receivables circularisation.
• Auditor requests client to confirm amounts owed by suppliers at a specific date.
• Suppliers respond directly to the auditor.

Payments After Year-End

• Verify that recorded payables have subsequent payments post year-end.
• Helps confirm the existence of payables at year-end.

Tracing

• Trace items on the payables ledger:
  • Path: Order → Goods Received Note → Invoice → Payable on ledger.
• Payments out should trace back through the cash book.
• Reverse tracing: Follow from orders to goods received notes to invoices in the payables ledger.
• All these tracing methods are detailed tests to confirm proper recording of transactions.