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Hello sir,
I just wanted to understand the meaning behind the following Audit procedures for payables and accruals:
“Review year end invoices and credit notes to confirm no further items need to be accrued”
Got this from the aa debrief mock exam video of walker from youtube.Now let me revise my understanding:
Accrual means we expense now but pay cash later when the invoice comes – like telephone bills.
So one reason to check for invoices post year end would be to confirm if we have not missed out on any accrual expense in the current year.But I do not see how credit notes fit in. First of all it should be debit notes right – as this is not about sales return but purchase return. Second of all, what has discovering a return in post year got to do with discovering we missed an accrual in current period ?
Please explain generously,
ThankyouI thought more on this and have come up with a reason why the tutor might have mentioned credit notes (though I have not watched the lecture and don’t plan to in a weekend).
Let me start by saying that the review of post-year invoices is the procedure most relevant to the COMPLETENESS assertion – see reference to “Goods received – not invoiced” accrual on page 93 of the notes.
As a general point, auditors will look at all major classes of transactions immediately before and after the year-end to test the cut-off assertion. Sales invoice, purchases invoices, credit notes, cash receipts, cash payments would all fall into this.
Now consider that if a customer has settled their account in full, but the audit client then issues them with a credit note (Dr Sales/Cr Receivable), their account will show a “negative” (credit) balance. (There are other reasons why receivable a/cs may have credit balances, which should always be investigated.) This can happen any time during the year …
… at the year-end, suppose total balances = $290k, but is made up of $313k Dr balances that have been offset by $23k genuine Cr balances (i.e. any that resulted from mispostings, for example, have been corrected).. Cr balances are liabilities. If material (which I think they would be in my example), the auditor would suggest that the client RECLASSIFY $23k by adding this amount to receivables and payables. This is an aspect of the PRESENTATION assertion (i.e. amounts should not be offset unless there is a right of offset – which there wouldn’t be here because every customer is different).
The same would be true of payables a/cs – if total Dr balances were material, the amount should be shown as receivables.
That said, in all my years as an auditor, I think there was only every one client whose “negative” balances were considered material enough to require this adjustment for presentation purposes in the SoFP. Though it was something that was checked routinely.
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