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.