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Your firm is the auditor of Shah Engineering Ltd, and you have been...

      

Your firm is the auditor of Shah Engineering Ltd, and you have been asked to suggest the audit work you will carry out in verifying trade creditors and purchase accruals at the company’s year-end of 31 December 2003. You attended the stock take at the year-end. The Company operates from a single site and all raw materials for production are received by the goods inwards department. When the materials are received they are checked for quantity and quality to the delivery note and purchase order, and a multi—part goods received note is made out and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy note is raised which gives details of the problems (e.g., incorrect quantities or faulty materials) The purchase accounting department receive the purchase invoice, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a microcomputer. The main sundry creditors and accruals at the year-end include:
a) Wages accruals and PAYE;
b) VAT;
c) Interest on loans overdrafts, telephone and electricity. Most employees’ wages are paid weekly in arrears.

You are required to describe in detail the audit work you will carry out to:
a) Check suppliers’ statements to the balances on the purchases ledger;
b) Verify that purchases cut-off has been correctly carried out at the year end.
c) Ensure that sundry creditors and accruals are correctly stated;

  

Answers

johnson
a) The work I will perform in checking supplier’s statements to the balances on the purchase ledger will include:
? I will assess the system of control in the purchases system and its credibility.
This will be based on the results of my tests of control, other investigations an
my experience in previous years. Where the purchases system is reliable, I will
check fewer items than if it is unreliable. If I find discrepancies in my audit
tests, I will increase the sample of items I check. I will check fewer suppliers’
statements to the purchase ledger balances if the company perform these
checks and corrects discrepancies;
? Generally I will check a larger proportion of suppliers where the balances are
large, or where there are a large number of transactions. Where there is no
supplier’s statements for one of these important accounts, I will either contact
the supplier to confirm the balance, or ask for a statement at the year end;
? Where the balance on the supplier’s statement is the same as the purchase
ledger balance, I will record this in my working papers and carry out no further
work;
? Where there are differences, these could have resulted from either goods in
transit, cash in transit or other differences;
? Goods in transit are invoices on the supplier’s statement, which are not on the
client’s purchases ledger. If these invoices have been included in the accruals, I may perform no further audit tests. However, for large value items, I will check
the goods received note (GRN) to ensure they were received before the year-
end. If there is no purchase accrual, I will check the date on the GRN. If the
date on the GRN is after the year-end, the treatment is correct. However, if it is
before the year end there is a cut off error, and management should be advised
to include the value of these goods in the current years closing stock and
accrual the amount payable;
? For cash in transit, I could check to the next month’s supplier’s statement that
the cheque was on the supplier’s sales ledger just before the year-end. An
alternative procedure is to check to the bank statement the date the cheque is
cleared by the bank after the year-end. If there is a significant delay in clearing
the cheque, this could indicate that the cheque might have been sent to the
supplier after year- end. If this has been happening, the value of these cheques
should be added to the year end bank balance and added to creditors at the year
end since the payment was made after the year end;
? For other differences, if they are small they can be ignored. However, if they
are significant I will discuss them with the client. The year end accounts should
include appropriate provision to allow for such differences;
? Based on these tests, I will assess whether they provide sufficient
evidence that the trade creditors and purchase accruals are correctly
stated at the year-end.

b) The best place to start purchases cut-off test is from goods received notes issued
immediately before and after the year- end. Generally, the test should cover a
sample of items during the period of two weeks before to two weeks after the
year -end.
At the stock take, I should have recorded the last goods received note number
issued before the year-end. This will assist in confirming that all items purchased
before the year-end are included in the stock and the liability disclosed. I will
select a sample of goods received notes issued before the year- end, and follow
through to the purchase invoice. For these goods I will check that:
? Either the purchase invoice has been posted to the purchase ledger before the
year end or a purchase accrual has been made;
? If there are book stock records, I will check that the goods have been
included in the records before the year -end.

There will be a purchases cut off error where either:
? The purchase invoice has not been posted to the purchase ledger before the
year end and there is no purchase accrual; or
? The purchase invoice has been posted to the purchase ledger before the year
end and there is a purchase accrual at the year end.
For goods received after the year- end, I will select a sample of goods received
notes issued after the year-end, and follow through to the purchase invoice. For
these goods I will check that:
? Neither the purchase invoice has been posted to the purchase ledger before the
year end nor a purchase accrual been made;
? If there are perpetual stock records, I will check that the items received have
not been included in the stock records before the year- end.
There will be cut off error where either:
? The purchase invoice has been posted to the purchase ledger before the year
end,; or;
? There is a purchase accrual made.

c) I will perform the following work in checking sundry creditors and accruals
? I will assess the level of accruals and the system of control. If the company’s
system of determining accruals is good, I will perform less work than if the
controls are weak;
? I will compare this year’s accruals with the previous year. I will investigate any
significant variances e.g. where there was an accrual in the previous year but
none this year;
? The wages accrual will be checked to the payroll, the accrual should be
equivalent to one weeks gross wages;
? The PAYE should be checked back to the payroll. The accrual should equal the
December PAYE payable. I will check to the cash book that the accrual is
equal to the payment made to the government in January 2004;
? The VAT creditor will be checked as being the net of out put VAT (VAT on
sales) and Input VAT (VAT on purchases). This should be checked against the
VAT paid over to the government in January 2004;
? Accrued interest on the bank loan and overdraft will be checked to be bank
confirmation received. For loans, the accrued interest should be the product of
the amount outstanding, the current interest rate and the time since the last
charge;
? Other accruals will be checked to invoices received after the year end;
? I will consider whether there are any circumstances which have arisen during
the year which may result in new accruals and I will check if these have been
made.
johnson mwenjera answered the question on August 4, 2018 at 12:10

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