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- January 20, 2021 at 12:14 am #607221
Question – You are an audit senior of Viola & Co and are currently conducting the audit of Poppy Co for the
year ended 30 June 20X6.
Materiality has been set at $50,000, and you are carrying out the detailed substantive testing on
the year?end payables balance. The audit manager has emphasised that understatement of the
trade payables balance is a significant audit risk.
Below is an extract from the list of supplier statements as at 30 June 20X6 held by the company
and corresponding payables ledger balances at the same date along with some commentary on
the noted differences:
Supplier Statement balance Payables ledger balance
$000 $000
Carnation Co 70 50
Lily Co 175 105
Carnation Co
The difference in the balance is due to an invoice which is under dispute due to faulty goods
which were returned on 29 June 20X6.
Lily Co
The difference in the balance is due to the supplier statement showing an invoice dated 28 June
20X6 for $70,000 which was not recorded in the financial statements until after the year?end. The
payables clerk has advised the audit team that the invoice was not received until 2 July 20X6.
A- 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
? 1, 2 and 3
? 1 and 3 only
? 1 and 2 only
? 2 and 3 only
My ques – As per answer it is just 1 and 2 why isnt 3rd a valid point ? By inspecting the cash book isnt it will tell us/confirm the the balance ?January 20, 2021 at 8:31 am #607241Paying $50k does not confirm that this amount is correct. To confirm that $50k is correct rather than $70k you need to audit the difference – i.e. confirm that the purchase invoice has been cancelled with a credit note and that the returned goods have been recorded back in inventory.
You may find this recent post helpful:
https://opentuition.com/topic/substantive-procedures-receivables-payables - AuthorPosts
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