Audit - goods rejected by audit client pending credit note from supplier

The title of this post is long, as we want to articulate out a scenario clearly for our reader to understand.

It is common for a company in trading/ manufacturing industry to return goods to the supplier, due to a number of reasons. For instance, returned of goods due to quality matters/ incorrect pricing as previously quoted/ excess quantity etc.

In some circumstances, return of goods is a straightforward process where the vendor would issue credit note to the audit client to reduce payable amount by your audit client.

However, there are circumstances where the vendor may not accept the goods returned and didn't issue any credit note to the audit client. There could be possibility that the supplier delay its process in issuing credit note. This may result in incorrect payable balance.

How can auditor pick up this instance. We can inquire management / accountant if there's any major dispute/goods returned matter yet to be resolved. In addition, we can also review reconciliation on statement of account issued by supplier to review if theres any long-standing reconciling item that may suggest goods returned not accepted by supplier.

To illutrate, if the statement of account from supplier shows a higher amount of receivable (from audit client) as compared to a payable balance recorded in audit client's book. This could be due to: a) payment made by audit client not yet received by supplier, b) goods returned by customer not yet accepted by supplier, c) goods delivered by supplier not yet taken up by audit client. An investigation into this reconciling item should tell the auditor what causes the difference.

Audit- offsetting receivale and payable balance

In some situation, your audit client may have receivable balance and payable balance with a same party, either external or internal party. For instance, your audit client may purchase raw materials part from Company A. Upon completion of manufacturing the goods, audit client sold certain finished goods to Company A. Consequent to these transactions, audit client has a receivale from Company A and a payable to Company A.

How should this amount been presented on the financial statement?

According to IFRS, the amount should be offset each other (i.e. presented as net) when:
- there is intention to offset (i.e. both parties intend to offset the amount) and settle net balance; and
- it's legally enforcable that the amount can be offset in all circumstances (including: in the event of liquidation/ bankrupt of either party)

To elaborate further, in order to present the amount as net, the law jurisdictions of audit client and Company A, must allow the amount to be offset in all circumstances, even when either party goes bankrupty. Logically, why is that so?

The accounting standard is worded such that- in the event of receivership, the receiver, who acts on behalf of the financial distressed company, would try to recover as much asset as possile, including financial receivable. Final Payment of liabilities usually only represent a fraction of the original amount.

As a result, iy may not be in receiver's best interest to allow offsetting. Accounting standard has considered this and hence emphasized that to present the balance as net when it is legally enforcable for balance to be offset in all situation.

Assessment get more complicated when the contractual parties are located at different countries.

Hence, a careful evaluation is warranted from management.

Implementation of Value-Added Tax (i.e. Goods and Service Tax) in Malaysia

Malaysia is going to roll out GST with effect from 1 April 2015 onwards. The entire business scene are likely to be affected directly or indirectly. If the Group company owns any branch or subsidiary in Malaysia, it is important to ensure that the management is already looking at managing this smooth roll out.


Generally, we expect the compliance costs to increase and there could be costs incurred /to be incurred with regard to the roll out of GST.


Based on our understanding, there have been a lot of discussion on the GST - which is not surprised. However, there are also expression of confusion by business in general on certain items - for instance, rental income earned on investment property.


From our point of view, whenever there is a change, the change need to be managed - hence, the company's process in place to manage the change is important - not only on GST but on all other matters as well.