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Hello mam, can you please explain how the following substantive procedures exactly help with the problem in the scenario where Y/e is 30 Oct?
”The finance director of Spider Spirals Co has informed you that at the year end the
payables ledger was kept open for one week longer than normal as a large bank
transfer and cheque payment run was made on 3 November 20X6. Some purchase
invoices were received in this week and were recorded in the 20X6 payables ledger
as well as the payment run made on 3 November.”Procedures:
”Obtain supplier statements and reconcile these to the payables ledger
balances, and investigate any reconciling items.
? Select a sample of payables balances and perform a trade payables’
circularisation, follow up any non?replies and any reconciling items
between the balance confirmed and the trade payables’ balance.”“Keeping open” the ledger means that there isn’t a “clean” cut-off on purchases/payments and this is spelt out by saying that payments were made on 3rd November and some November purchase invoices were captured.
“obtain supplier statements … reconcile” and “perform circularisation … ” are describing the same thing. The auditor would only need to request statements directly from suppliers where the client doesn’t have them (or if there was reason to suppose that the client had “doctored” statements received from suppliers).
See Chapter 18 for references to cut-off, reconcilations and accounting for reconciling items.
Ok mam so I hope I’ve gotten it right that: in these procedures we are clearly assuming that clients doesnt have any records maintained to help us with cut off procedures which is why we are seeking external evidences to see the dates on them?
No it doesn’t mean that the client doesn’t have “any records” – the client should routinely have month-end suppliers statements and should reconcile them – and the auditor can place some reliance on that as a control. But the auditor cannot rely solely on the client’s controls but must carry out substantive procedures. Here the risk concerns cut-off so the substantive procedures have to respond to that specific risk – i.e. obtain sufficient, relevant and reliable evidence regarding the accounting treatment of transactions in the intervening period 1-3rd November.
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