Acca aa s21 Notes

TRADE PAYABLES
Many of the audit procedures that are carried out on the payables balance are similar in principle to 
those that are carried out on receivables balances.
Note, however, that the auditor will be particularly worried about the possible understatement of 
payables: how can the auditor detect a payable that is missing form the financial statements?
๏
It’s important to reconcile the sum of the individual payables balances to the balance on the 
control account. In other words, the total of payables in the statement of financial position 
agrees to the detailed amounts payable to each supplier.
๏
Correspondence with suppliers and board minutes may allow identification of disputes or 
amounts which might not be paid, or amounts which may not yet appear in the payables ledger, 
but which are been claimed by suppliers or other parties. It’s often by reviewing 
correspondence in board minutes that contingent liabilities are discovered. Contingent 
liabilities arise because of some event which has already happened, but whose outcome is 
uncertain. For example, a legal claim. Later you will see how contingent assets and contingent 
liability should be treated in the financial statements.
๏
Trace from purchase orders to goods received notes (where relevant) to purchase invoices and 
credit entries in suppliers’ - to ensure completeness and an accurate cut-off. Trace from credit 
entries in the accounts to purchase invoices then back to goods received notes (where relevant) 
and purchase orders - to ensure existence.
๏
Trace from cash book payments (before and just after year end) to suppliers’ accounts and vice 
versa - to ensure accurate cut-off. Reviewing after-date payments may identify year-end 
liabilities; if not included in the payables balance these will need to be accrued (see next 
Chapter). 
๏
Payment period, that is the number of days of purchases in payables. It is calculated as payables 
divided by purchases per day. If the payables period increases, it may indicate that the company 
is being more careful about when payments are made, but it could indicate that the company is 
having difficulty making payments as they become due. By increasing the payables period, the 
company might begin to lose out on receiving cash discounts. This can become quite an 
expensive source of finance and needs some explanation. 
๏
Carry out or reperform reconciliations of individual payables balances to suppliers' statements.
If the client does not receive regular monthly statements from suppliers, the auditor may use 
external confirmation procedures to request direct evidence of amounts owing at the reporting 
date.