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.