Sunday, October 10, 2010

#94- Auditing Creditors III

In our previous entries in relation to auditing creditors and auditing creditors II, we discussed about the audit procedures for trade creditors balances:

(i) Review of Creditors' Statement of Account
(ii)Purchase cut-off testing [ Please also refer to interesting comments posted by our readers

Apart from the procedures mentioned above, auditor should also perform analytical review, by comparing current year creditors' balance to prior year creditors' balance to investigate if there's any unusual fluctuations or absence of expected fluctuations.

For instance, sales volume for ABC company reduced substantially during the year, while the trade creditors balance has increased significantly. We need to understand / analyse the reasons caused the increase in trade creditors' balance while the sales volume has dropped substantially. One of the possible answer is due to the ABC Company is having liquidity issue, and resulted in delaying in repaying its trade creditors.

A good and thorough analytical review give auditor a better understanding of the business.


Anonymous said...

i always believe that comparing current and prior year positions for balance sheet items may not give a reliable audit evidence on its own, unless its coupled with an analytical of the entire cycle. for example; payables, inventory and expenses. then maybe it will give better evidence.

Ong Jian He said...

comparing the current and prior yrs is the fastest way for auditor to determine if there certain areas to look at specifically. It is like sniffing for clues to look at.

But at the end of the day, auditor still need to understand the company business environment to understand the risks that it is facing and use that to determine if the current figure does reflect the business environment the company is facing.

Current and prior year is more for the preliminary analytical analysis during the audit planning stage. That is the most useful.

Kauditor said...

Hi Anonymous and Jian He,

Thanks for contributing to the blog. You are right that , one audit procedures is not sufficient to capture the complete picture of the business. It's imperative to compare the fluctuations to our expectation, based on our understanding of the business.

Nevertheless, variance analysis if one of the way need to be performed by the auditors, and compare the fluctuation to our expectation. Any differences need to be investigated.

John Papers said...

Thanks for this post.