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Good morning,
I must admit I’m struggling to fully understand which audit assertion is checked by the audit procedure. Some of them are obvious but some of them are not that easy for me. For example:
1. Inspect after date cash receipts and follow thorugh to pre-year-end receivables balances verifies valuation, rights and obligations and existence BUT in case of trade payables the same procedure (inspect after date payments, if they relate to the current year then follow through to the purchase ledger or accrual listing) verifies only completeness. Why not valuation and obligations as well? Is it because completeness is the main focus for payables?
2. Obtain a listing of trade payables from the purchase ledger, cast to verify arithmetical accuracy and agree to the general ledger and financial statements – verifies completeness. Why not existence and valuation as well? I’m aware of the fact it’s quite unusual for the companies to include in financial statements payables which do not exist. On the other hand, the total from trade payables listing may be both higher or lower from the amount in financial statements – why I’m checking completeness only?
3. Perform a positive receivables circularisation – verifies existence and rights and obligations. For trade payables circularisation it’s existence and completeness verified. Why not obligations as well?
4. Inspect the sales ledger for credit balances and discuss whether they should be reclassified as payables – verifies existence of receivables and completeness of payables. It seems quite logical until I look at the same procedure for payables (inspect purchase ledger for debit balances) which verifies valuation of payables and completeness of receivables. Why not existence of payables? Why the procedure for receivables does not verify valuation as well?
5. Trace all unpresented cheques through to a pre-year-end cash book and post year-end statement – verifies valuation and completeness. How am I checking completeness and not existence of the cheque being recorded in reconciliation? I thought maybe it is the other way around – I’m actually checking the completeness of the cash and therefore if the cheque was recorded but shouldn’t be, then the cash amount is incomplete. Am I right?I’ve got few more examples but maybe my way of thinking is just wrong and someone would be able to explain. I really would like to understand.
Thanks in advance!
When giving lots of example please number so I can reference my responses.
In short – it is not the procedure which determines the assertion – but the assertion which drives the procedure.
The assertion of completeness is looking at what is recorded in the financial statements – you are asking “should something be included which has been excluded”? So for payables you are looking to confirm that there have been no omissions – for example, looking at payments after the year end – should they be y/e liabilities? If yes, have they been included? Or looking at purchase invoices processed after the y/e – were goods received before or after the y/e? (cut-off) If before the y/e (included in inventory) they must be included in payables also. For the audit of payables – checking from invoices/payments to inclusion in the financial statements is aimed at completeness assertion – but for the obligation assertion you are considering the “opposite” direction. Obligation you are asking whether there is a liability for what has been included – so you check from the financial statements amount – to the goods received note (for example) by way of the accounting system.
In 2. it is the direction in which you are testing – from the system to the amount in the financial statements which makes this a test primarily for completeness – though clearly it is a test of accuracy of amount too.
3. You have to remember that requesting an external confirmation is only part of the procedure. For suppliers, with a principal risk of understatement the auditor is requesting a balance from suppliers – this will usually come in the form of a supplier’s statements. But the y/e obligation will depend on how that balance reconciles to the client’s ledger balance – e.g. if there is cash (from client to supplier) or goods (from supplier to client) in transit – there is no obligation.
4. Because of the risk of bad debts only the receipt of cash proves absolutely the valuation of receivables..
5. You “see” unpresented cheques on a bank reconciliation – they represents amount which should be in the cash book but not yet on the bank statement. The assertion of existence relates to “cash at bank” – it does not relate to individual transactions/cheques.You may find this post useful https://opentuition.com/topic/audit-procedure-audit-responses-substantive-procedure-etc/
5. are you checking for completeness because you would expect the unprecedented cheque before the year end, to be present in the year end cash book but not present in the year end bank statement due to the time delay in which the bank clears it?
6. is it not possible for an unprecedented cheque to be before the year end, but the bank to clear it and process it in the bank statement by the year end?
7. Doesn’t trace the unprecedented cheque to pre-year end cash book and post year end bank reconciliation only refer to unprecedented cheques, just before (near the end) of the year-end, and that was not processed by the bank, so not included in the bank statement until after the year-end?
Thanks in advance
In a world of cheques … a customer sends a cheque as payment to a supplier. The supplier presents (note the word) to its bank. The bank obtains the funds for the supplier from the customer’s bank (assuming the customer has sufficient funds – if not, the cheque “bounces”). Looking at this scenario as auditor of the customer – the double entry for any cheque which they have written out is:
Dr Payable and Cr Cash
But, until it “clears” the banking system it will be reconciling item on the bank reconciliation (unpresented – not unprecedented – cheques).
If I gave you a cheque for £2,000 on 31 December (assume the year end), I would not expect you to “sit” on it but bank it promptly. So too, the auditor will expect cheques to “clear” and appear on the January bank statement. If a cheque doesn’t clear for some time – or at all – I would be suspicious – perhaps the cheque was not sent to the supplier at all – just written out and stuffed in a drawer (“it’s in the post”).what happens when the cheque bounces, and the bank is unable to claim the fund from the customers bank?
How would you adjust the cash book entry that was already made?
Do you debit receivables and then credit cash by the cheque amount?does it show up in the post-year bank statement that the cheque bounced bank? in which case you were wrong to consider it as an unpresented cheque?
I guess not clearing the unpresented cheque could be seen as an attempt to lower the cash (asset) stated in the SFP without actually having your actual cash levels reduced (since it is not actually sent to supplier to take money out)?
thank you in advance
Essentially yes to 1st Q:
Say I owe you $2,000 – I give you a cheque – you:
Dr Cash $2,000
Cr Trade receivables $2,000
You cannot spend that $2,000 until it “clears” the banking system. If the cheque “bounces” – because I do not have $2,000 in my bank account – you do not get the money and I must still owe you $2,000. So now you:
Dr Trade receivables $2,000
Cr Cash $2,0002nd Q – no – this would be outstanding lodgement (i.e. cheque from a customer you are paying into your bank) – not unpresented cheque (a cheque you have sent to a supplier).
3rd Q – yes this describes the effect.
Please look at the proforma I referenced on your other post – unpresented cheques and outstanding lodgements (which may be cheques as well as cash) are simply timing differences.
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