In previous posts in relation to auditing creditors, we mentioned about:
- Review of Creditors' Statement of Account
- Purchase Cut-off testing
- Comparison of current year balance to prior year balance
In addition to the above, it would be good if a creditors' turnover analysis is performed:
Creditors Turnover (day): Purchase/ Average Trade Creditors x 365 [for periodic inventory system]
Creditors Turnover (day): Purchase/ Average Trade Creditors x 365 [for perpetual inventory system]
Auditor can compare the creditors' turnover (day) computed above to general creditor term given by the creditors to assess if the Company has been repaying on time. If the creditors' turnover (day) is significantly longer than the credit term given by suppliers, this might indicate the liquidity issue the Company is facing.