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Hi, why C is not the answers?
Lily Co
Statement balance 175
Payables ledger balance 105The 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.
Which of the following audit procedures should be performed in relation to the balance with Lily Co to determine if the payables balance is understated?
A. Inspect the goods received note to determine when the goods were received
B. Inspect the purchase order to confirm it is dated before the year end
C. Review the post year-end cashbook for evidence of payment of the invoice
D. Send a confirmation request to Lily Co to confirm the outstanding balanceANSWER:
A
In order to determine if the balance with Lily Co is understated, the auditor should determine if the goods should be included in payables at the year end by inspecting the goods received note.So the question is – should the $70k be included in the payables amount?
The supplier’s statement indicates yes – by virtue of the invoice being dated before the reporting date. However, Lily will only have a liability (Dr Purchases/Cr Payables) if it received the goods before the reporting date. If the goods were received on or after 1 July (i.e. goods were only in transit to Lily at the reporting date), Lily would have no liability.
That the invoice is paid some time after the reporting date doesn’t confirm that the goods were received before the year-end date.Thanks.
Does it matter if the invoice is not received until 2 July 20X6 although the invoice date is 28 June 20X6? Will it affect anything?
Does it mean the goods received note and purchase invoice have to be received before the reporting date for us to recognise liability? Or we recognise liability when the goods received note has been received regardless of when the invoice is received?
What if the goods received note have been received before the reporting date and the invoice only been received after the reporting date?
Sorry if my question sounds confusing because I am confused too
The customer’s liability to pay for the goods arises when the goods are received – the invoice date is irrelevant (whether earlier or later). At the end of the year, the accountant will look at all the goods received for which invoices have not yet been received and prepare a listing – this will be priced up to get to an approximate amount to be accrued – the “goods received not invoiced accrual”. Look for references to “cut-off” in our notes – e.g. page 75 and Chapter 18 in particular.
You will see on page 75 – goods are received – the GRN is a document that is raised internally – it is the supplier’s invoice that is received.
Thanks.
Is it right if I say: –
Situation 1:
Goods received note received before reporting date and invoice received after reporting dateDr Purchases
Cr Accued expensesSituation 2:
Invoice received before reporting date but goods received note received after reporting dateDr Prepayment
Cr PayablesSituation 3:
Goods received note and invoice received before reporting dateDr Purchases
Cr PayablesA goods received note isn’t “received” – it is the physical receipt of goods that gives rise to a liability. A pre-PAY-ment arises when CASH is paid in advance (“pre”) of the receipt of a good or service – again, nothing to do with documents but the physical payment of cash.
So if you delete “note” from your D/Es then 1) and 3) are correct. I hope you can see that the only distinction is that in 3), the Cr is payables by virtue of the purchase invoice being posted to the payables ledger.
2) should be nothing – if no goods received it’s not in inventory.
Perhaps you should look back to FA/F3 notes also for accounting for accruals and prepayments.
Thanks for your explanation and can I know what do you mean by “D/Es”?
I have looked back on the FFA notes on your advice.
Based on what I read,
If we have received the goods before reporting date but the invoice is in transit, we can
DR Purchases and CR Payables since based on accruals concept,
“purchases are matched to the period in which they were made, by accounting for all credit purchases when they took place and setting up a payable in the SOFP for the amount due”?And since the invoice was in transit, we therefore have not paid for the goods received by the reporting date. So, we have to DR Purchases CR Accrued expenses?
If that is the case, does that mean if Lily Co’s goods were received before the reporting date but the invoice was only received after reporting date, we will therefore not post the payables of $70k to the payables ledger since it is accrued expenses?
Then, does that mean Lily Co’s payables ledger of $105k is not understated although the supplier statement balance shows $175k?
D/E = double entry
Invoice is recorded in purchase day book which is posted to general ledger (Dr Purchases/Cr Trade payables) – this will happen as at the date the invoice is received.
It doesn’t matter if already at the y/e an accrual has been made because these “period end adjustments” (accruals and prepayments) simply “fall out” in the expense to profit or loss for the following period.
Liabilities would be understated if the goods were received before the y/e (and therefore included in inventory) but not included in either trade payables or accrued expense.
Liabilities will not be understated if the goods were not received – because there is no liability (!)
Hi,
I think I got the double entry wrong
When “goods received not invoiced” happen, we should
Dr Purchases
Cr Purchase Reserve/Purchase accrual/Goods received not invoicedWhen the invoiced are subsequently received in the following period, we then need to
Dr Purchase Reserve
Cr PayablesThe “purchase reserve” account is not the normal accrued expenses account. It is a purchase arrual account
Is it correct?
The goods received not invoice accrual is not the same as the normal accrued expenses that we did for electricity or utility bills
Is it right?
Accruals can be made for any goods/services received/consumed before the y/e, for which the invoice is not received until after the y/e. The one for purchases could be called “purchases accrual”, “goods received accrual”, “goods received not invoiced accrual” – it doesn’t matter (!) All accruals will be added up to a single amount which will most likely be added to trade payables – i.e. a single line “trade payables and accrued expenses” in SoFP.
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