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Which of the following audit procedures should be carried out to confirm the balance owing to Carnation Co?
1. Review post year-end credit notes for evidence of acceptance of return.
2. Inspect pre year-end goods returned note in respect of the items sent back to the
supplier.3. Inspect post year-end cash book for evidence that the amount has been settled.
Answer is 1&2. Why 3 is wrong?
In the absence of more information and assuming that Carnation is a supplier of the audit client I would say because the tests should be directed at understatement – what liability hasn’t been recorded? Simply paying $100 to settle a recorded liability of $100 doesn’t mean that $100 was all that was owing/should have been recognised as a liability. Presumably the scenario pointed to some invoices having been excluded from the amount owing on the grounds that goods had been returned to the supplier (and so were not included in inventory). To confirm this the auditor would want to see a goods return note – raised before the end of the year – and a credit note (from the supplier) confirming the cancellation of the invoice in respect of the goods returned.
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