Consider results of tests of controls over investments.
1. Obtain or prepare a lead schedule of investments
(a) Trace last year’s balances with last year’s working papers.
(b) Check arithmetical accuracy of the schedule.
(c) Trace totals of the schedule to general ledger control account and balance sheet. (Valuation and completeness)
2. Inspect entries in• investments and related income accounts.
(a) Check additions and sales
(b) Inspect board of directors minutes for authorization of sales and purchases of investments. .
(c) Re compute gain or loss on sale of investments. (Occurrence, classification, accuracy)
3. Inspect shares and securities on hand. (Existence, rights and obligations)
4. Obtain confirmation for securities held by third parties. (Existence rights and obligations, completeness)
.5. Re compute investment income. (Valuation,)
6. Inspect documents for fair valuation of investments.
(a) Verify cost with brokers’ advice
(b) Determine market value of shares of listed companies with stock exchange quotations.
(c) Determine fair value of unquoted investments on the basis of latest available audited accounts of invest companies. (Valuation)
7. Perform analytical procedures.
(a) Compute following ratios:
Short term investments to total current assets. Long term investments to total assets
Rates of return on various investments
(b) Compare actual results with budgeted and prior year. (Valuation, completeness)
8. Inspect financial statements to check that investments have been disclosed, classified and described in accordance with IFRS and comply with statutory requirements
1. Obtain or prepare a lead schedule of accounts payable
(a) Trace last year’s balances with last year’s working papers
(b) Check arithmetical accuracy of the schedule.
(c) Trace totals of the schedule to general ledger and balance sheet (Valuation, completeness)
2. Test details of accounts payable transactions.
(a) Vouch purchases to supplier invoices, goods receiving notes, purchase orders, and other supporting documents.
(b) Vouch cash paid to cash book
(c) Vouch other debits to accounts payable with goods returned note and other supporting documents.
(d) Agree control account with subsidiary ledger
(e) Review causes for debit balances in creditors accounts. , (Occurrence, classification, accuracy)
3. Inspect cut off documents
(a) Select a sample of transactions from purchases journal for a few days before and after year end and examine suppliers’ invoices and goods receiving notes to determine that purchases were recorded in correct periods.
(b) Select credit notes received during first week of the subsequent accounting year and examine supporting documents such as GRN and determine that the returns were recorded in the proper period. (Cut off)
4. Carry out prepayments and accrual cut off test to determine whether expenses are recorded in the correct accounting period. (Cut off)
5. . inspect documents to search for unrecorded liabilities
(a) Examine subsequent payments between the balance sheet date and the date of completion of field work.
(b) Examine suppliers’ invoices recorded after year end
(c) Investigate unmatched purchase orders, goods receiving notes and supplier invoices at year end.
(d) Inspect suppliers’ statements
(e) Inspect unpaid invoices file.
6. Confirm accounts payable
(a) Select individual accounts for confirmation. Including those with small balances and zero balances.
(b) Trace amounts per confirmation requests to accounts payable ledger.
(c) Letters requesting confirmations should be dispatched by the auditor.
(d) Creditors should be requested to reply directly to the auditor.
(e) Confirmation letters should be authorized by the management.
(f) Investigate differences between amount per books and amount confirmed by the suppliers. (Completeness, valuation)
7. Carry out analytical procedures.
(a) Industry experience and trends
(b) Cost of sales to accounts payable (Completeness)
8. Inspect financial statements to check that accounts payable have been disclosed, classified and described in accordance with IFRS and comply with statutory requirements.
(a) Determine that payables are properly classified as to type and expected period of payment.
(b) Check that debit balances have been reclassified as assets.
(c) Identify related party balances
(d) Ensure that advance payment to suppliers for future delivery of goods and services are classified as advances to supplier and should be included in current assets
POINTS TO NOTE
I. In carrying out substantive test of accounts payable the auditor is more concerned with understatement rather than existence assertion.
2. Goods supplied by the vendor FOB shipping point should be included in inventories and accounts payable of the buyer. On the other hand, goods in transit shipped FOB destination should be part of inventories of seller and should not be included in the inventories of buyer and account payable until arrival at the buyer’s warehouse.
3. Unlike accounts receivable confirmation, it is not mandatory to send confirmation to accounts payable The reasons are;
(a) Even if 100% accounts are selected for confirmation, prove for completeness cannot be obtained. Unlike account receivable, a large coverage of accounts selected for confirmation will provide evidence for existence.
(b) Unlike accounts receivable, where the invoices and delivery notes are generated internally, in case of accounts payable external evidence in the form of suppliers’ statements and supplier invoices are available for inspection.
(c) Accounts payables are generally settled within a relatively short time after end of year.
(d) Accordingly, an examination of subsequent payments upto the date of completion of field work assist in search for unrecorded liabilities. This may not be the case with some accounts receivable which may be good but slow payer. Where, however, suppliers’ statements are not available and internal controls are weak, it is advisable to confirm accounts payable.
4. It should be noted that that confirmation of recorded accounts payable cannot be an appropriate means of procedure to dete unrecorded accounts payable.
5. In accounts payable confirmation, accounts for small and zer balances (all suppliers with whom the. client has made purchas recently) are also selected to detect understatement or omission – certain balances. The auditor is not concerned to cover larg percentage of recorded balances. He is more concerned with Iarge value of unrecorded balances. He will, therefore, select those accounts with large volume of transaction. For example purchases from Company A during the year were Rs. 800,000 and the ending balance was Rs. 10,000; purchases from Company B were 40,000 and ending balance was Rs. 35,000. The auditor will be more concerned about verifying amount payable to Company A as the chances for understatement are much more in case of Company than in case of Company B
6. The above discussions should not be construed to imply that the auditor is not concerned with overstatement of liabilities. The matter is only of relative emphasis on understatement. It is just possible that in order to avoid taxation, the expenses and liabilities are overstated.