To perform effective and sufficient testing on borrowings is not only focus on control testing but also focus on control validation by selecting some supporting document for vouching.
The auditor could use different methods and amounts of sample to be vouched based on the risk assessment result. There is a good start for understanding the overall picture of borrowings testing before going detail to its audit procedures.
Understanding its control, assertions and possible risk is a good start for all auditors to design effective audit procedures.
Before specifically go to the understanding control of borrowings, the position of the borrowing which presented in the balance sheet, a part of the financial statement is really important for accountants when preparing financial statements for their company.
Borrowing is a fund which the company gets it from other related corporate companies or financial institutions to operate their business.
In short, borrowing is referred to as a liability that one company owes to other related corporate companies or financial institutions to run their business.
Borrowing listing must be prepared to keep tracking of the movement of its balances. In the borrowing listing, the audit could get information such as sources of those borrowings and ending balances of the current borrowed amount which presented in the financial statements as mention above.
Borrowing is a significant area that auditors must be focusing on. Deeply understanding of its control is required to perform by an experienced auditor.
- Completeness: Completeness is one of the assertions that auditors should be focused on. To ensure the completeness of the borrowings in the balance sheet, the auditor has to obtain borrowing listing to reconcile with trial balance (TB). If there is variance, under/overestimated might be occurred and further reconciliation must be performed.
- Existence: There are the risks that the borrowings presented in the balance sheet might not have existed. The auditor should perform checking on the borrowing contract by selecting some transactions in the borrowing listing.
- Accuracy: This assertion is concerning the actual amount of the borrowing which presented in the balance sheet as well as in the borrowings listing. It means that amounts and other data relating to transactions have been recorded at the correct amounts. For instance, the amount appearing in the borrowing contract is reflected in the actual borrowing amount from the lender.
- Presentation and disclosure: This assertion is concerning the disclosure of significant information that matters to other users of the financial statements. That information includes accounting manual, term, and condition of borrowings as well as its interest payment to the lenders.
Common Risks Related to
Audit risks related to borrowings are different based on auditor understanding of its control, the nature of the borrowings and also the time constrain that allows the auditor to perform the audit. The following are the risks that normally come up when performing an audit on the borrowings;
- The significant variance of borrowing reconciliation which management could not explain to the auditor. In this case, the auditor needs to ensure that the variance is explained with the proper acceptable explanation.
- The discrepancy between balance per recording and its supporting document: It is important for the auditor to perform a test of detail by selecting some sample of borrowing transactions to check. It is a risk that impacts audit opinion.
- Borrowing contract is loss during the auditing period: To achieve the audit testing on the borrowings, vouching on borrowing contract is required. In case that the contract is a loss, the audit could not ensure that the borrowing has existed and accurate. Another audit documentation and justification is required.
- Reconcile the borrowings listing to the general ledger and trial balance: The auditor should obtain the Company’s borrowings listing and financial statements for the period of auditing as well as relevant period. Before working on the listing of the borrowings, the auditor should make sure that the listing and the TB are reconciled.
- Obtained movement of the borrowings during the period: The auditor should obtain the movement of borrowings and re-perform to make sure its movement is correctly performed.
- Perform testing on the movement of the borrowing is important for the auditor to ensure the balance of the borrowing is tight to its supporting document. Meant that, the audit should test the addition of the borrowings during the audited period as well as payment of the borrowing to lenders by obtained its supporting documents for vouching.
- Sending borrowing confirmation is also an important part for the auditor to ensure the ending balance, interest rate, and maturity date as well as to achieve the audit’s assertions.
Written by San Chancrersna
The cost of goods sold testing is conducted at the same time as inventory testing is carried out for purposes of the balance sheet. The cost of goods components can broadly be categorized into two major components.
Firstly, the auditor is supposed to determine the overall amount of inventory sold.
If the auditor has been able to test the amount of inventory that is readily available on hand, in addition to the amount that was available initially, the amount can be calculated by simple addition.
Furthermore, the auditor is also required to calculate the inventory sold on a unit basis. This is mainly completed from making selections from a listing of the items sold by the company on a per-unit basis.
However, in addition to these basic calculations, the
auditor is supposed to have a procedure designed to ensure that he can give a
true and fair view regarding the overall policies that are in place.
In order to determine the audit procedure for the cost of goods sold, there are a couple of things that should be taken into account.
These issues are concerning the overall procedures that are likely to be followed to ensure that there are no issues that might mitigate the auditor from giving a proper judgment.
When it comes to the cost of goods sold, the auditor has a number of responsibilities and factors that should ideally be taken into account.
First and foremost, they should ensure that there are internal controls sufficiently present over inventories and cost of goods sold.
In the same manner, it is also important to consider the basis for determination for the existence of inventories and the occurrence of transactions that majorly affect the cost of goods sold. The major component for the cost of sales is mainly inventory counting.
It is really important to ensure that inventory-related measures are properly taken care of, essentially because of the tantamount importance, it has, not only on the Income Statement but also on the Balance Sheet.
There are a number of procedures that can be used by the auditor pertaining to the Cost of Goods Sold. These audit procedures are given below:
- Cutoff analysis. This requires auditors to examine the relevant procedures to ensure that the physical inventory count is for the relevant period only. This also includes a process for halting any further receiving into the warehouse or shipments from it at the time of the physical inventory count, so that additional inventory items are already excluded.
- Observe the physical inventory count. Counting inventory can also be one of the most integral parts of the accounting process for many companies. In this regard, the auditors want to be fully aware of the procedures that are used to count the inventory. This requires them to discuss the counting procedure with the accountants, observe the accounting process, and apply random sampling to check for any inconsistencies.
- Reconcile the inventory count to the general ledger. Auditors also ensure that they are able to trace the valuation that is compiled from the physical inventory count to the company’s general ledger, to verify that the counted balance was carried forward into the company’s accounting records.
- Test high-value items. In the case where there are items in the inventory that are of unusually high dollar value, the auditors are most likely supposed to spend some extra time to count them physically in inventory. Therefore, this can ensure that they are valued in a correct manner, and subsequently, trace them into the valuation report that carries forward into the inventory balance in the general ledger.
- Test item costs. When deciding on the audit procedure, it is also fundamentally important to ensure that the purchased costs in your accounting records are physically traceable. This can then be compared with supplier invoices to the costs listed in your inventory valuation.
- Test for lower of cost or market. Cost of Sales involves inventory mainly, it is important to have all the relevant values correctly. Therefore, this requires the auditors to follow the lower of cost or market rule. It should be ensured that inventory items are recorded at lower of cost or net realizable value.
- Direct labor analysis. In the case of manufacturing companies, it should be ensured that if direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during the production process on time cards or labor routings to the cost of the inventory. This amount should be taken into consideration in order to fully evaluate the overall costs that have been charged under this particular head.
Therefore, in addition to these specific assertions and procedures pertaining to the cost of sales, it is also important fundamentally important to ensure that the other basic assertions are fully taken into account.
These assertions include the following: Accuracy, Completeness, Cut-Offs, Right and Obligations, and Understandability.
Overall, the audit procedures that are designed by auditors keeping in mind the overall presentation and calculation behind the cost of sales is an increasingly integral part, because of the fact that it is something that is often misrepresented or miscalculated by accountants.
Traceability of items in the cost of sales is often a tiring process, which also requires physical verification.
Therefore, the overall chances of error surrounding this particular head are often high.
In this regard, all the procedures that should ideally be designed must include all the relevant elements, which can mitigate the overall chances of fraud or misrepresentation in the Income Statement.
Having said that, it is also really important to realize that the audit procedure for every audit assignment will differ from client to client.
Despite a basic blueprint that can be followed (as mentioned above), there will still be additional factors that should be taken into account depending on the nature of the work itself, and the scope of items that are included in calculating the cost of sales for the respective organization.
Audit procedures are mainly used by auditors in order to determine the overall quality of the financial information that is provided by their clients, subsequently resulting in the expression of an auditor’s opinion.
As far as company expense reviews are concerned, it can be seen that auditors are supposed to evaluate the expenditures in order to make sure they were necessary and in line with internal policies.
The exact procedures used will vary by client, depending on the nature of the business, audit risks and the audit assertions that the auditors want to prove.
How to design the audit procedure?
Audit procedure normally design by auditors based on the characteristic of target transactions or event risks that associate and the approach that auditor respond to those risks.
Risk assessment contributes significantly to auditors to design the right audit procedures.
Right audit procedures do not
only help the auditor to perform their work more effectively but also
contribute to the auditor in minimizing audit risks (detection risk).
When designing the audit
procedure, the auditor must make sure that all of that procedure contain and
address three important things.
- The assertion that auditor want to confirm
- Procedure to test that assertion
- Reason to perform the procedure
After performing a risk assessment, the auditor will be identified that risks that they think might happen to financial statements.
For example, the auditor might things the inventories that reporting in the financial statement might not exist. In this case, existence is the assertion that the auditor wants to test.
Therefore, inventories observation is the procedure that should be included in the inventories’ audit procedure.
The way how to perform, the number of inventories to be observed needs to be stated clearly to make sure that the auditor in charge of this cycle could understand.
However, there are several general classifications of audit procedures:
Controls over Internal Expense
As far as internal controls are concerned, it can be seen that companies have many types of internal controls related to expenses. Some of the invoices may require certain levels of signatures, and others may require a written contract.
One of the first steps in an audit is to evaluate paid expenses against how closely they follow the internal controls. This is basically to ensure that the expenses have actually occurred in reality.
of Expenses Check
This is to ensure that the expenses that have been declared can be considered ordinary.
For example, an invoice of $100 for a small box of stapler pins would not be considered reasonable and will likely raise a red flag. Therefore, it is an audit procedure to ensure that only expenses that are necessary are incurred.
However, as far as this particular expense is concerned, it can be seen that the reasonability measure often depends on the nature of the business and even of the department.
Timeliness of the transactions is also an additional procedure that must be accounted for. This involves checking for the expenses to ensure that they have been incurred in the existing year or not.
In the case of a wide time gap makes it harder for companies to make sure the expenses are legitimate and reasonable. The main auditing procedure in this regard is the time factor, and the relevant year in context.
This audit procedure is mainly about amounts and other data relating to transactions and events have been recorded at the correct amounts. This means that the amount appearing in the source documents is true and real.
The relevant audit procedure in this regard is about auditors randomly selecting invoices and asking to see all the original paperwork. This may also include contracts if they exist, invoices and signatures.
A final check is to ensure that all vendors exist and are real businesses. One of the ways fraudulent transactions occur is for an employee to set up a nonexistent vendor and submit made-up bills.
This is also an increasingly important factor because a lot of expenses might be overstated in order to reduce the profits for purposes of tax. Therefore, it is an audit procedure to ensure that these aspects have been properly covered.
Another Audit Procedure regarding operating expenses is to ensure the correct classification of the operating expenses. Audit procedures are used to decide whether transactions were classified correctly in the accounting records.
Classification is a really important part, especially when it comes to operating expenses because of the fact that a lot of organizations end up classifying operating expenses as capital expenditures and vice versa.
Therefore, there is a need to ensure that no such activity is carried out which might impact the overall credibility and reliability of the financial statement itself.
Audit procedures can test to see if any transactions are missing from the accounting records.
For example, the client’s bank statements could be perused to see if any payments to suppliers were not recorded in the books, or if cash receipts from customers were not recorded.
The main idea behind this is to ensure that all the expenses have been completely recorded, and not adjusted to impact the financial statements in any manner.
The audit procedures that have been mentioned earlier are quite subjective from client to client. This is primarily because of the reason that with different nature of businesses, different operating expenses are incurred.
Therefore, it makes sense to assess the overall situation contingent on the line of business of the client himself.
Furthermore, it should also be taken into account that the main audit procedures (accuracy, reasonable, etc.) will stay consistent regardless of the nature of the business.
However, this does not mean that the overall list is exhaustive.
In fact, there are several other factors that need to be incorporated as part of the audit procedures varying from situation to situation.
Employee benefits have been characterized by the Bureau of Labor Statistics as any type of aberrant or non-monetary remuneration paid to a worker.
These might be legally necessary or guideline, as are business commitments to Social Security or medicinal services benefits, or they might be optional, for example, commitments to retirement investment funds or took care of time.
Associations offer benefits to their employees since they advance employment fulfillment and motivate laborer steadfastness, which, thus, can prompt better money related execution. They are given by associations notwithstanding compensation to make an aggressive bundle for the potential worker.
Benefits can be very significant. Restorative protection alone can cost a few hundred dollars every month. That is the reason it’s essential to think about benefits as a feature of your complete remuneration.
Ensure you comprehend which ones you will get. Offering benefits to your workers is significant in light of the fact that it gives them you are put resources into their general wellbeing, however their future. A strong worker benefits bundle can pull in and hold ability. Benefits can assist you with separating your business from rivals.
Benefits keep on advancing. For instance, numerous businesses offer an expanding cluster of choices that give laborers more prominent adaptability in offsetting work with different aspects of life. Family-accommodating strategies, (for example, working from home) and profession related benefits, (for example, instructive help) are only a couple of the contributions from contemporary bosses.
However, giving more elevated levels of benefits includes some significant downfalls. Over the previous decade, the adjustment in benefits costs has outpaced the adjustment in the expense of wages and pay rates. This is inferable, to some extent, to the expanded expense of medicinal services benefits.
Additionally, benefits are not equally spread among the workforce; a few laborers are almost certain than others to approach benefits. All-day laborers, for instance, have more prominent access to benefits than do low maintenance laborers, and laborers in enormous foundations normally have more noteworthy access to benefits than do those in little foundations.
Laborers who have a place with a trade guild likewise are bound to be offered benefits than the individuals who are in occupations in which laborers are not unionized.
In addition, approaching an advantage doesn’t really imply that laborers decide to get that advantage. It basically implies that the business makes the advantage accessible.
In the event that you’ve at any point earned a check, you’ve most likely seen that a portion of your cash is taken out for things other than charges. Where does this cash go? A portion of these findings goes toward paying for lawfully required benefits.
For instance, the two managers and employees must add to two obligatory social protection programs: Social Security and Medicare. Government disability, the biggest segment of legitimately required benefits, gives budgetary help to laborers and their families when laborers resign, bite the dust, or become incapacitated.
Medicare gives human services help to more established specialists and to individuals with long haul inabilities. Commitments to these projects are part equally among employees and businesses.
The employees’ segment is taken straightforwardly from their checks as a duty, regularly alluded to and noted on pay stubs as Federal Insurance Contributions Act or Old Age, Survivors, and incapacity protection for Social Security findings and as Medicare emergency clinic protection for Medicare derivations.
Businesses’ and workers’ commitments are saved to a money related establishment and afterward moved to the Internal Revenue Service. Other lawfully required benefits incorporate Federal and State joblessness protection and, in many States, laborers’ pay.
Managers add to the Federal-State Unemployment Insurance Program, which gives money related help to laborers who lose their positions through no issue of their own; at any rate, three States expect workers to make commitments, as well.
In many States, bosses additionally should add to State laborers’ remuneration programs, which give budgetary help to individuals who can’t fill in because of a work environment damage or sickness.
Restorative protection takes care of the expenses of doctor
and specialist charges, medical clinic rooms, and physician endorsed drugs.
Dental and optical consideration may be offered as a component of a general
benefits bundle. It might be offered as independent pieces or not secured by
any means. Inclusion can some of the time incorporate the employee’s family
Bosses, as a rule, pay all or part of the premium for employee
medicinal protection. Regularly employees pay a level of the month to month
cost. The expense of protection through a business. Most plans give inclusion
to visits to essential care doctors and pros, hospitalization, and crisis care.
Elective restorative care, wellbeing, remedy, vision, and dental care inclusion
will fluctuate by the arrangement and manager.
Managers are required to give human services to employees who
work at any rate of 30 hours out of every week. Some low maintenance laborers
are secured by boss plans, yet many are not secured. A few businesses give a
motivating force to employees to quit their arrangement.
Dental Care Plan Coverage
Organizations with dental consideration benefits offer
protection that helps pay a part of the expense for dental treatment and care.
Contingent upon the organization’s arrangement for dental care benefits, dental
inclusion incorporates a scope of medicines and strategies. Most protection
plans spread the fundamental strategies, for example, routine teeth cleaning
Essential administrations would likewise incorporate
fillings, crisis help with discomfort, root trenches, and dental crowns. At
last, Major administrations can incorporate bridgework, intelligence teeth
expulsion, false teeth, and other complex methodology. A few plans spread all
practices, as orthodontic work notwithstanding fundamental dental care.
Incidental benefits and Perks
While these benefits are important and do hold money related
worth, the employee’s pay continues as before, and the worker can’t “money
in” or exchange the ideas for more significant compensation. Incidental benefits
are not legally necessary and differ from boss to boss. Different sorts of benefits
are not legally necessary yet are normally given to laborers. Since these benefits
are intentional, businesses and workers have more noteworthy authority over
them. The table on page 17 shows the absolute most normally offered benefits
and the percent of laborers who approach them. The benefits in the table are
depicted on the pages that pursue and incorporate medicinal services, life, and
other protection; paid leave and retirement; and different benefits, for
example, vocation related and family-accommodating projects.
Adding to the trouble with finding a reasonable meaning of worker benefits is that universally, perspectives on “benefits” are altogether different than those in the United States. The International Accounting Standards Board characterizes employee benefits as “all types of thought given by a substance in return for administration rendered by workers or for the end of business”.
The IASB definition doesn’t look to separate the two parts of remuneration, in particular, wages and benefits; its motivation is to guarantee that all types of installments to employees are effectively represented as some type of pay thus the definition is essentially a comprehensive one.
Among industrialized countries, employee benefits may contrast both in degree and in kind, depending, to some extent, on how much the benefits are controlled or financed by governments. Medicinal services, for instance, are commonly regulated through one of three kinds of projects: a national wellbeing administration, a national medical coverage framework, or a multi-payer protection framework.
In the initial two, medicinal services are made good on thorough assessments and don’t go into the business relationship. In nations utilizing some type of the multi-payer framework, managers and employees add to human services costs. Note, however, that a couple of countries have “unadulterated” forms of these projects.
In a multi-payer country like the United States, the legislature may sponsor medicinal services costs for poor as well as older individuals. Different nations utilize a similar type of this framework where bosses help to finance the expense of medical coverage, the appropriation is an employee advantage and is viewed as one of the most significant of the benefits that businesses offer.
The appropriation can be a willful one or one that is required by some type of government guideline.
When the audit strategy is being designed, a key preference is given to the judgments that shall be made, in order for the selection of the most effective and efficient audit procedures to be performed. This judgment process of the selection of effective auditing procedures is best done considering the following three factors of the audit:
The nature of the audit allows the auditor to choose from a variety of audit procedures. These methodologies incorporate review, perception, request, affirmation, recalculation, investigative techniques, and re-execution and might be utilized all through all phases of the review procedure.
The auditor tests resource adjusts “as of” the
announcement of net resources accessible for benefits date. Nonetheless, once
in a while data gave to the examiners to help adjusts is starting at a date
other than the announcement of net resources date.
The auditor decides the degree of testing the person in question will perform. The important degree of a substantive review technique will regularly rely upon the materiality of the record, divulgence or exchanges; the surveyed danger of material misquote, and the vital level of confirmation from the system.
In order for the audit of the Employee benefits plan to be efficient and productive, the auditors shall consider some of the below-stated procedures to evaluate the information from the employee benefits plan as part of the audit process:
- Discuss with trustees, plan administrator, or another appropriate representative of the plan, the scope of the audit. Determine whether the scope of the audit will be restricted (limited-scope audit).
- Make inquiries of plan management concerning whether the arrangement’s budget summaries will be set up incongruity with for the most part acknowledged bookkeeping norms or with another exhaustive premise of bookkeeping.
- Make inquiries of employee benefits plan management concerning investment assets held by outside custodians
- Make inquiries of employee benefits plan management concerning who keeps up the arrangement’s bookkeeping records and members’ information
- Make inquiries of employee benefits plan management concerning extent to which computer applications are used
- Make inquiries of employee benefits plan management concerning preparation and use of interim financial statements
- Make inquiries of employee benefits plan management concerning preparation and use of budget
- Make inquiries of employee benefits plan management concerning the plan’s maintenance of a list of parties in interest
- Make inquiries of employee benefits plan management concerning the benefit plan procedures for identifying reportable transactions
What are Auditing procedures?
Audit procedures are the modest steps that auditors deal with to verify the accuracy of the balances and accounts handed over to them by their clients.
Audit procedures vary for different classes of accounts and by the diversity and description of the client’s business themselves. Audit procedures guide the auditors to look at the balances and verify them from different ends to make their opinion on the accuracy of those balances.
These audit procedures will, therefore, help the auditor outline any discrepancies that exist.
Explaining accounts payables:
Accounts payables are the balances that an organization owes to its suppliers or service providers. When suppliers or service providers deliver their products to the organization, the description and prices are intimated in the sales invoices furnished by suppliers.
When these invoices are dealt with internally by the system, they are introduced in the accounts payables ledger. By accumulating these balances from different suppliers, a single accounts payable balance is extracted which is called accounts payable balance at the year-end.
Payables accounts are liability balances that will be compensated in the prospective periods to their corresponding creditors. They are posted under the current liability section of total liabilities, have a credit nature and increase the potential outflows of resources from the organization.
Purpose of applying audit procedures on accounts payables:
Balances in the financial statements are always exposed to associated risks. These risks may be either due to fraud or error which results in the misstatement of those balances.
Unique audit procedures are applied by the auditor to verify the assertions used in the balances such as existence, rights and obligations, completeness, accuracy, classification, and presentation.
Applying procedures on these assertions will guide the auditor to extract misstatements in payables balances if there are any. Assertions in payables will be explained in a structured detail below
Risks associated with the nature of accounts payables:
There are some universal risks associated with accounts payables. First, there is an inevitability about the human error which results in misstatements due to errors.
This risk is more probable when there is no synchronization in the accounts payables and other associated departments such as procurement. The reason there is a risk of misstatement in the payables balances is because of no segregation of duties in the payables division.
Allocating more human resources to the payables section means there is more domination over the balances. Segregation of duties also reduces the misstatement due to fraud.
Accounts payables balances may also be misstated due to fraud or unethical behavior of the client. Fraud may result because of personal perks such as acquiring supplies for higher prices than the original price of the material and then claim back those perks from vendors.
Unethical behavior means the client may reduce the accounts payables balance by different means to window dress the figures of the balance sheet for bright financials.
This can be because the client wants to increase the current ratio or other liquidity ratios to impress banks or other financial institutions for resources of finance.
How and what assertions are tested by audit procedures?
Assertions related to accounts payables that are necessary to be verified are listed below:
In the grounds of audit, testing the assertions related to
transactions and balances are necessary to accomplish a fair and quality audit.
Enough audit procedures are necessarily applied to analyze these assertions.
Existence is a verification process used to authenticate if the payables figures genuinely exist at the year-end. There are some occasions in which the payables balance may be higher than what is presented in the ledger.
There may be some balances that are not payable by the client and hence can be verified by sending confirmations to vendors.
Rights and obligations:
This assertion can be applied to accounts balances in terms of
obligations the client holds for those balances. These obligations may include
further penalties (obligations) if the client delays the payments. This can be
verified by reading the terms and conditions among creditors and the client.
Completeness is the verification of accounts payables balances
and checking if the general ledger balances are complete according to real
payables listings. Sending direct confirmations to vendors will help in
verifying these balances.
Verification of accuracy is to find if the totals extracted from
individual balances are performed precisely. Recalculations procedures are
carried out to audit this assertion.
Classification is the verification of a class of accounts payables. Auditors need to see if payables balances are perfectly classified in payables subclasses and debits and credits are accurately applied.
Presentation in accounts payables means that if there are any
unusual figures in the accounts payables, then they should be presented in the
notes to the financial statements to support them further by a narration.
Audit Procedures for verification of Payables balances:
As discussed above, misstatements may result because of fraud or
error, the auditor should apply the following audit procedures to verify the
- Applying analytical
procedures on payables balances against other periods to check any unusual
increase or decrease.
- The auditor should
observe the payables balance posting procedure. This will demonstrate to the
auditor about the efficiency of the controls over this area.
- Compare current year’s
opening balances to the previous year’s audited accounts closing balances to
verify that the current year’s accounts are initiated with correct figures.
- Recalculate the figures
from the general ledger and for the individual vendor’s balances to verify the
- Obtain samples for
vendors and inspect documentation to check that the correct figures are posted
in the system. This procedure leads to knowing the process of client’s payables
- Obtain the ledgers
sample total balances for vendors and compare them with total balances from the
listing to check that factual balances are recorded in the ledger.
- Recalculate the breakup
balances of individual vendors to verify the total figures are correctly
- Comparing the individual
payables amounts to their relative expense or purchase figures in the original
supporting documents to verify that correct figures are recorded in the
- Sampling various vendors
figures from the ledger and checking if their corresponding transactions have
occurred for genuine purposes.
- Sending direct
confirmations to creditors to verify the amounts owed by the client to their
vendors. This is a third party confirmation which is a highly relied procedure
for the auditor.
- Obtaining the nature of
payables balances and check that necessary corresponding disclosure is made in
the notes to financial statements.
Introduction to Audit procedures
Audit procedures are the primary part of the audit engagement for auditors to test the accuracy and legality of balances and transactions. Audit procedures guide the auditor to test those balances and transactions in distinct ways.
Audit procedures are exclusive for every diverse client and are based on the risks associated with the client and the accounting heads in their financial statements.
Audit procedures identify any misstatements that occur due to fraud or error. However, various procedures are applied to accomplish the desired purposes of the audit.
What are accounts receivables?
There are two types of accounts that an organization maintain in their books of accounts. A transaction assertion is a temporary account that is not transferred to next year but is closed in the current financial year such as sales, cost of sales, and expenses, etc. The others are balances accounts that are carried forward to next year by updating the balances.
Account receivables are an asset balance account in which the amounts owed by the customers are refurbished. Once supplies or services are rendered to customers, the company renews its general ledger for the invoiced amount.
Accounts receivables general ledger is updated with every non-cash transaction between the company and the customer. This means that supplies or services are rendered to the customer but are not yet paid or partially paid.
These amounts when accumulated at the year-end, give a large particular amount that is imported into the financial statements of the company.
Accounts receivables is an asset account, the balances of which will be received in the forthcoming periods from the customers. Some amounts in this total are expensed out when the company perceives that they are no longer collectable.
Accounts receivable are recorded in the current assets section of the total assets head of the balance sheet. Account receivables have a debit nature and increase the potential inflows of the organization.
Applying audit procedures on Accounts receivables:
Audit procedures are applied to the accounts receivables balances to test their assertions. Testing these assertions include verifying its existence, rights, and obligations, completeness, accuracy, classification, and presentation.
These assertions may be materially misstated due to fraud or error. It is the responsibility of the auditor to perform unique audit procedures for every assertion and reveal any misstatement if present.
However, the extent of applying audit procedures depends on the control systems implemented in the accounts receivables division and how efficiently are those controls practised to bring about the results.
Inherent risks in the accounts receivables balances:
There are some built-in risks the accounts receivables balances.
These risks may result in misstatements due to fraud or error. There may be
certain circumstances in which the accounts receivables officers may skip some
balances or insert wrong postings.
These risks are more probable when there is no connection between corresponding departments involved in the accounts receivables.
In some instances, the management may intentionally increase the accounts receivables figures to give a positive signal to stakeholders, for example by reporting next or previous year’s sales in the current year.
One important and primary risk involved in the accounts receivables balances is that the organization has not expensed out the amounts of the bad debts in the receivables balances, which they acknowledge cannot be recovered anymore.
Bad debts occur when the customers do not pay according to the terms agreed with them by the supplier. These balances should, therefore, be expensed out.
Bad debts curtail the profits made by the organization in the current year and because they will contemplate to not expense them out.
Assertions tested by audit procedures:
Testing assertions are the fundamental part of the audit that is
tested by the auditor. Every assertion has its own risk of material misstatement
involved in it. Risks present in these assertions and how they can be distilled
by the auditor are explained below:
The audit of existence in accounts receivables means to verify
the actual existence of these balances. The auditor will analyze the breakup of
accounts receivables by customer’s listings and confirming them by sending
direct confirmations to customers.
Rights and obligations:
There is not a big reason to worry about the rights of the accounts receivables of the company. However, in some major companies, the accounts receivables are transferred to a factor to collect them on behalf of the company for a discount.
This, therefore, transfers the rights to the factoring company, which will be inspected by the auditor.
It is possible that the company for the sake of reducing tax liability, intentionally missed out some receivables balances for the sales made. This compromises the completeness assertion.
The auditor can confirm these balances by sending blank confirmations to customers along with testing the cash receipts after the year-end which may relate to the sales made in the current year.
Accuracy is a simple assertion in which the auditor performs the
recalculation procedures to test the accuracy of the accounts receivables.
Misstatements may occur because of human errors by skipping or summing up extra
Presentation means disclosing the major issues in the accounts
receivables such as a large balance in the accounts receivables has gone
uncollectable which the company needs to expense out. The auditor needs to
check the extent of disclosures made in notes to the financial statements.
Unique audit procedures for testing accounts receivables:
- Matching opening balances of accounts receivables to last year’s closing balances.
- Applying analytical procedures to find any unusual differences and reasons behind them.
- Obtaining receivables ageing report from the client and matching the figures to accounts receivables general ledger.
- Recalculating the figures of accounts receivables general ledger to confirm the accuracy.
- Verification of invoices against the supporting documentation to verify that correct postings are carried out in the general ledger.
- Verifying the sales period by inspecting the shipment documents of those sales.
- Verifying completeness and existence by sending direct confirmations to debtors.
- Reviewing the company’s policy for allowance for doubtful debts and applying it to the receivables balances.
- Comparing general ledger balances to actual receivables listings and checking their accuracy.
- Analyze that the necessary disclosures for bad debts and other significant events are correctly presented in the notes to the financial statements.
- Applying cut off procedures to verify that amounts recorded in the current year do not relate to other periods.