Audit Procedures for Trade and Other Payables: A Comprehensive Guide

Trade and other payables represent a significant part of a company’s liabilities.

An audit of trade and other payables is designed to ensure that the financial statements accurately reflect the organization’s obligations to its suppliers and other parties. 

This article will provide a comprehensive guide to audit procedures for trade and other payables, covering accounting under IFRS, audit risks, audit assertions, walkthrough testing, a test of controls, and substantive audit procedures.

Accounting under IFRS

Under International Financial Reporting Standards (IFRS), trade and other payables are recognized and measured at fair value. 

Fair value is the amount paid to settle the liability in an orderly transaction between market participants at the measurement date. 

Payables are recognized at fair value and subsequently measured at amortized cost using the effective interest method. 

Disclosure requirements include information about the nature and terms of the payables, their carrying amount, and the expected timing of payments.

Audit Risks

1. Inaccurate Recording of Payables: If payables are not accurately recorded, the financial statements may be materially misstated.
2. Misstatement of Liabilities: If liabilities related to trade and other payables are not accurately recorded, the organization may not clearly understand its financial position.
3. Inadequate Internal Controls: If internal controls over the trade and other payable processes are inadequate, the organization may risk fraud, errors, or misstatements.
4. Misclassification of Liabilities: Liabilities related to trade and other payables may be misclassified in the financial statements, leading to material misstatements.
5. Fraudulent Activities: Fraudulent activities, such as embezzlement, kickbacks, or bribery, may occur in the trade and another payable processes.
6. Inadequate Documentation: If documentation related to trade and other payables is inadequate, the auditor may not obtain sufficient evidence to support the reported balances.
7. Inaccurate or Incomplete Supplier Records: If supplier records are accurate and complete, it may be easier to verify the reported trade and other payable balances.
8. Inaccurate or Incomplete Purchase Orders: Purchase orders must be accurate and complete to verify the reported trade and other payable balances.
9. Unauthorized Purchases: Unauthorized purchases may have been made, resulting in an overstatement of trade and other payable balances.
10. Misappropriation of Assets: Misappropriation of assets may result in understating trade and other payable balances.

Audit Assertions

The audit assertions for trade and other payables include the following:

1. Completeness: All trade and other payable balances that should be included in the financial statements are included.
2. Accuracy: The trade and other payable balances are accurate in the financial statements.
3. Existence: The reported trade and other payable balances represent the actual obligations of the organization.
4. Rights and Obligations: The organization has the legal right to use the goods or services provided by its suppliers and is obliged to pay for them.
5. Valuation and Allocation: The trade and other payable balances are properly valued and allocated in the financial statements.
6. Presentation and Disclosure: The trade and other payable balances are presented and disclosed by relevant accounting standards.

Walkthrough Testing

During the walkthrough testing, the auditor should perform the following steps:

1. Understand the system of internal controls: The auditor should understand the system of internal controls over the trade and another payable processes, including the segregation of duties, authorization and approval procedures, and the process for recording and reconciling accounts.
2. Select a sample of transactions: The auditor should select a sample of transactions representing various types of payables to test the process from initiation to payment.
3. Trace the transactions through the system: The auditor should follow the selected transactions through internal controls to ensure that the controls operate effectively and that the transactions are recorded accurately.
4. Document any deficiencies: The auditor should document any defects in the system of internal controls, including any control failures or exceptions, and communicate them to management.

Test of Controls

Test of controls is a procedure used to test the effectiveness of internal controls over the trade and another payable process. 

The auditor should perform the following steps:

1. Understand the controls: The auditor should understand the controls in place over the trade and another payable processes, including segregation of duties, authorization and approval procedures, and the process for recording and reconciling accounts.
2. Design the test of controls: The auditor should design a control test appropriate for the identified risks and the specific control being tested.
3. Perform the test of controls: The auditor should perform the test of controls by selecting a sample of transactions and testing the operating effectiveness of the control.
4. Document any deficiencies: The auditor should document any deficiencies in the internal controls and communicate them to management.
5. Evaluate the results of the test of controls: The auditor should evaluate the results of the test of controls and determine whether the control is operating effectively.

Substantive Audit Procedures

Substantive audit procedures are used to obtain evidence about the completeness and accuracy of the trade and other payable balances in the financial statements.

The auditor should perform the following substantive audit procedures:

1. Confirmations: The auditor may confirm the balances owed to suppliers or other creditors by mail or electronically.
2. Review of supplier invoices: The auditor should review a sample of supplier invoices to verify the accuracy of the amounts recorded in the accounting system.
3. Review of payments: The auditor should review a sample of payments made to suppliers to ensure that they were properly authorized and recorded.
4. Analytical procedures: The auditor should perform analytical procedures, such as ratio analysis, to identify unusual trends or fluctuations in the trade and other payable balances.
5. Review of contracts: The auditor should review the contracts or purchase orders related to the payables to ensure they are properly authorized and recorded.
6. Inspection of documentation: The auditor should inspect documentation related to the trade and other payables, such as invoices, purchase orders, and payment records, to verify the accuracy and completeness of the recorded amounts.
7. Comparison to prior periods: The auditor should compare the trade and other payable balances to prior periods to identify any significant changes or fluctuations.
8. Testing of cutoff procedures: The auditor should test the cutoff procedures for the trade and other payable balances, including the timing of recording and payment.
9. Assessment of allowance for doubtful accounts: The auditor should assess the allowance for doubtful accounts related to the trade and other payable balances to ensure that it is properly estimated.
10. Review of subsequent events: The auditor should review subsequent events for any indications of liabilities related to the trade and other payable balances.

Conclusion:

An audit of trade and other payables is critical to ensure the accuracy and completeness of the financial statements. 

By following the above procedures, the auditor can obtain sufficient evidence to support the reported balances and identify any deficiencies in the system of internal controls.