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OVERVIEW
Objective
SOURCES OF
EVIDENCE
RISKS
IAS 37
Provisions
Contingencies
Litigation
RECONCILIATIONS
Control a/c
Individual suppliers a/c
Cutoff
A comprehensive audit program for payables, accrued expenses and provisions is set out in
Appendix 3.
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SOURCES OF EVIDENCE
1.1
1.1.1
Distinction
Example 1
Complete the following ideas list for trade accounts payable and accrued
expenses.
Solution
1.1.2
Ideas list
1.1.3
Accounting systems
Documentation
Tangible assets
Analytical procedures
1.2
Provisions
1.2.1
Definition
Examples
1.2.2
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RISKS
2.1
Liabilities incurred may be unrecorded (e.g. purchase invoices not processed). Financial
statements do not reflect extent of liability and expenditure is understated.
Secured liabilities may not be identified and security may not be disclosed.
Accrued expenses (e.g. for goods/services received but not invoiced) relating to current
year expenditure may be omitted.
Liabilities may be recorded/payments to suppliers made for goods not received (due to
error or fraud).
2.2
Provisions
RECONCILIATIONS
A comprehensive audit program for trade payables and accrued expenses is set
out in Appendix 3.
3.1
3.1.1
$
Cash a/c (cash book)
Balance b/f
(opening trade payables)
x
__
__
x
__
x
__
Balance c/f
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3.1.2
Reconciliation
3.2
Unlike accounts receivable, good quality third party evidence in the form of suppliers
statements may exist. These are the suppliers trade account receivable, sent to their
customers to prompt payment.
The main audit procedure for the verification of trade payables and accrued expenses is
the examination of suppliers statement reconciliations. It is essential that reconciling
items are properly accounted for.
A limitation of this procedure is that the customer may not receive or keep statements
from all suppliers. Additional steps will then be necessary to confirm existence and
completeness of amounts payable, including:
Example 2
Describe how would you confirm the following items on a reconciliation of a
balance per a suppliers statement to the balance per the payables ledger a/c.
(Assume suppliers statement and ledger a/c balances both as at the end of the
reporting period.)
Solution
3.2.1
Reconciling item
3.2.2
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How verified
3.3
Cut-off
3.3.1
Individual suppliers statement reconciliations identify items (see above) which are
checked to ensure that cutoff between purchases/payables and cash is correct.
3.3.2
The source document for checking the accuracy of cutoff it the goods received note
(GRN).
Goods received before the end of the reporting period (i.e. included in inventory as at
the end of the reporting period) must be included in purchases for the year and trade
payables (or goods received not invoiced accrual)
Goods received after the end of the reporting period (i.e. excluded from end of the
reporting period inventory) must be included in purchases for the next year and not
included in trade payables at the end of the reporting period.
IAS 37 PROVISIONS
4.1
Provisions
4.1.1
Amounts
Narrative
Disclosure
In extremely rare cases, when information may be seriously prejudicial, it need not be
disclosed. But general nature of dispute and reason for not disclosing info should be
disclosed.
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4.2
4.2.1
Contingent liability
(a) A possible obligation arising from past events whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the enterprise; or
(b) A present obligation arising from past events (an obligating event) which is not
recognised because:
(i) an outflow of resources is not probable; or
(ii) it cannot be measured with sufficient reliability.
Contingent asset A possible asset arising from past events whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events
Quantified probabilities
4.2.2
General description
Flow of resources
Obligation
Asset
Remote
No disclosure
No disclosure
No disclosure
Probable
Disclosure required
Provision
4.2.3
Disclosure
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4.3
4.3.1
Use information obtained from discussions with any in-house legal department.
Ordinarily specifies
Requests lawyer to
4.3.2
FOCUS
You should now be able to:
distinguish between:
recognise and account for contingent liabilities and contingent assets in accordance with
IAS 37.
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EXAMPLE SOLUTION
Solution 1 Sources of evidence
Accounting systems
Documentation
Purchase
requisitions/orders/invoices/GRNs, cheque
payments
Tangible assets
Analytical procedures
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