Saturday, September 4, 2010

#93- Auditing Creditors II

In addition, we should perform purchase cut-off test to address the potential risk of misstatement arising from improper cut-off.

As an auditor, we can examine the Goods Received Notes ("GRN") near year-end and after year-end to check that Goods Received Notes details matached with the supplier's delivery order details and supplier's invoices details.

For instance, Auditor Arthur is auditing Company E (whose year end is 30 June 2010) creditor's balance. As part of cut-off testing procedure, Auditor Arthur requested the details of Goods Received Notes near year-end and after year-end. And noted the following sample:

"Goods received notes was generated on 01 July 2010, however, supplier's invoices, supplier's DO indicated the date of 30 June 2010. Further investigation revealed that, supplier generated their internal documents on 30 June 2010, but only delivered the goods to Company E in 01 July 2010. As such, there's no exceptions for Company E"

Cut-off testing is deemed as a compulsory procedure in auditing creditors' balances.

12 comments:

Anonymous said...

Very Interesting!
Thank You!

Ong Jian He said...

I did an audit trying to do purchase cut off.. The problem with purchase cut off is that invoice is in series from the supplier especially when there is quite a number of supplier that the client purchase from.

What I did for the audit is run the client GL system to check for the last five invoice for the financial year and the first five invoice for the new financial year then we do tracing.

Is that correct as that is what my senior told to do. If it is wrong, can you tell the correct way of doing purchase cut off?

sewa mobil said...

Nice article, thanks for sharing.

Kauditor said...

Hi Jian He,

Great to hear from you. Kindly subscribe as one of our blog's followers.

5 invoices before and another 5 invoices after year end might not be sufficient, from audit point of view. Nevertheless, it depends on the scale of the business.

What I would suggest is: we should performed our audit procedures based by extracting Goods Received Notes issued two weeks before and two weeks after year end ( this period could be shorten, depends on professional judgement) to check that goods received are recorded in appropriate period.

Goods received notes is definitely a better source, as compared to supplier's invoices.

Ong Jian he said...

If you use goods received notes, it is the client confirmation but not the third party/independent confirmation.

What if the client hide some of the goods received notes from the auditor so that to reduce the creditor amt in the balance?

Kauditor said...

Hi Jian He,

It's great to hear from you again. You have rightly pointed an interesting point. In normal circumstances, the Goods Received Notes ("GRN") has to be sequentially numbered. While auditors are furnished with the list of GRN, auditors need to ensure that the GRNs are sequentially numbered. Queries need to be raised while there are missing GAP.

In addition, reviewing creditors' statement of reconciliation is one effective way to ensure that all liabilities have been properly taken up by the suppliers.

Hope this clarify your queries.

Ong Jian he said...

Hi,

That definitely helps as supplier statement of accounts is one very good of confirmation from the third party for external evidence.

Thanks for reply my queries.

Mandy said...

Hi,

Thank you very much for all the helpful tips! Very useful for us audit newbies :)

May I ask about peforming cut-off test for administrative expense? I was instructed to select the last 5 invoices (or rather, journal vouchers) before year end and first 5 invoices (journal vouchers) after year end. May I know if this is the correct/effective way? Since there are no GRNs for admin expense.

Thank you very much.

Kauditor said...

Hi Mandy,

Glad to hear from you. It would be glad if you can subscribe as one of our blog's followers also.

There is no right or wrong answer. It depends on your firm methodology. In our opinion, 5 invoices before and 5 after year end might not be sufficient. Generally, administrative expense occurred day-to-day and may cover different types of expenses.

It would be more effective to mitigate the risk of improper recorded if you can extend your testing period to one to two weeks. Alternatively, you may request for creditors' confirmations from those creditors the Company dealt with frequently.

Anonymous said...

hye i am sarah. i am new in this field. do you mind sharing the objective of cut off test? I understand it but it is very hard for me to convey my understanding into proper sentences in my working paper. thank you =)

Anonymous said...

Why use Goods received report instead of supplier invoices?

suqhra suqhra said...

Nice I like your explanation