The audit of payables, almost the reverse of the audit of receivables, with some important differences. In the audit of receivables, our prime concern is that we don't overstate the value of receivables.
The danger with receivables is that something is appearing as an amount due from a customer which will never be paid with the audit of payables our fear our danger is that we exclude a payable and therefore the payables are understated however first things first we would reconcile the detailed balances in the ledger the sum of those to the control account again the total creditors figure the total payables figure doesn't actually exist It's maybe made up of a hundred, several hundred of individual payables balances. And we have to make sure that the figure that's in the financial statements, which is a total figure, is actually made up of a number of discrete payables balances. And it's those which we're primarily going to be attacking and auditing. We'll look at correspondence with our suppliers.
There may be payables which have been outstanding for a long time at some point, where we're telling our suppliers, look, you didn't supply raw materials of the right quality, we're not going to pay this, or we want to get 50% off or whatever it's going to be. We might have corresponding with our suppliers saying, look, we've already paid this and so on. But anything which is a kind of an issue on these payables balances is worth looking at.
and if it's a really big issue if you've got a really large shipment of raw material worth a lot from a supplier and you found it was of inferior quality you'd expect that matter to be escalated up to the board where they would have some sort of policy on it. payables period this is the analytical procedure you'd look at here if the payables period both years is about 40 days then that's giving you some satisfaction that payables are probably right, but if payables were to decrease substantially, you have to wonder why. If payables days were to decrease substantially, you have to wonder why. Why are we suddenly paying these people far earlier this year than previously?
And the real fear is not that we're paying them earlier, which is worth finding out. The real fear is that the payables period is formed because we have left out some payables and the payables balance has been reported is too small. statement reconciliation this is great it's a third party written confirmation coming from your suppliers telling you what they think you owe them there will of course be small timing differences again but in some countries the receipts of statements from suppliers is so normal so common that this stands in the place of doing a payable circularization it's not quite as good maybe as a circularization because of course these documents are not going straight to the auditor they're going straight to the client who then passes them on and the client could be throwing away statements which are in disagreement but statement reconciliation is a powerful source of evidence. I'll put in here because the habit differs a little bit between different countries to some extent but you can also do here a payables circularization done very much the same way as a debtor's circularization, receivable circularization.
This is where the auditor asks the client to write to suppliers, to write to people to whom they owe money, and to confirm the amount owing at a particular date. And the supplier will write back directly to the auditor confirming that amount, we hope. Payments after year-end, another test of detail really. If we're saying that we owe somebody 10,000 and this stems from an invoice let's say about the 2nd of December still outstanding at the end of December then we would probably expect to see some cash going out sometime in January and the fact that the cash has gone out is giving us some evidence that the payable did actually exist at year end. And then we have all the tracings that we can do here we can trace items on the payables ledger why does it get there how does it get there well it it must be there really because of an invoice and the invoice is there because of the goods received note and the goods received note is there because we placed an order if a payable comes off the payables ledger it must have been paid so we can trace payments to and from the cash book to see why have they taken this payable out on let's say the 15th of december ah yes they say it's come from the cash book let's look at a cash book and see that money going out to that supplier we've got also for the sake of completeness trace the other way if you ever go to the file of orders you have orders quite late on maybe orders in november december trace that to maybe a receipt of goods in december a goods receive note delivery note and we would expect to see probably an invoice that's come in in December we'd expect to see that in the payables ledger again these tracings are all tests in detail