Acca aa s21 Notes

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Suppliers' statement reconciliations
are the main audit procedure to verify the 
completeness
of trade payables. All reconciling items must be properly accounted for. For 
example:
‣
Cash-in-transit (i.e. payments by client not received by supplier) - confirm that payment 
appears on the bank statements shortly after the year end;
‣
Goods-in-transit (i.e. goods invoiced by supplier not recorded by the client) - confirm that 
goods were received after the year end or, if received before the year end, that the invoice 
has been accrued;
‣
Disputed invoices (e.g. not recorded by the client because the goods were refused or 
returned) - if dispute is valid, invoice should be subsequently cancelled with a credit note 
from the supplier. 
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September 2021 to June 2022 exams
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Chapter 19
ACCRUALS AND PREPAYMENTS
Prepayments and accruals are likely to be small relative to receivables and payables, but they can 
nevertheless be material and need to be audited. 
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Compare to last year. One of the first steps normally carried out is to compare this year’s accruals 
and prepayments with last year’s. Many accruals and prepayments arise because of periodic 
payments whose pattern doesn’t change very much from one year to the next. For example, if at 
the end of last December two months of rent have been paid in advance, probably that is going 
to be the case this year because the rent will be payable at particular times of the year. Similarly 
if there was an accrual for wages in last year’s financial statements because the workforce is 
normally paid a week in arrears, almost certainly you would expect to find a similar accrual in 
this year’s financial statements.
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Scrutinise payments made shortly after/shortly before year end. To identify accruals it is going to 
be very important to look at payments made just after year end and to see whether or not any of 
those relate to the period covered by the financial statements. Similarly, with respect to 
prepayments, looking at invoices paid in the last few months of the year may identify some 
which partially relate to services which are not going to be provided until after the year end.
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Analytical procedures. The overall level of expenses can also be important. If an expense varies 
widely from one year to another, one potential explanation is that there has simply been a 
difference in payment date and that an accrual or prepayment is needed to ensure that the 
financial statements are drawn up using the accruals or matching principle.
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'Goods received - not invoiced' accrual. As mentioned in the previous chapter, there may be 
timing differences between suppliers' statement balances and payables' balances. Since goods 
received before the year end will be included in physical inventory, the corresponding 
purchase/liability must be recorded. If the invoice has not yet been received, it must be accrued.
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Letter of representation. We will cover this in more detail later. Suffice to say at the moment that 
it is a letter from the directors to the auditors making certain representations, for example, that 
all liabilities have been accounted for in the financial statements.