Substantive testing liabilities

Question 1

Major risks of misstatements relating to payables and related assertions

Answer 1

Understating liabilities to manipulate financial statements- completeness

Incorrect cut-off which can affect completeness.
(This can be caused by delay in receiving invoices due to invoices sent in the mail or a delay in posting to when the goods are sent out etc)

Need to ensure we record invoices at the right dates and not just when we receive goods etc

Question 2

Sources of information which can be used to gather evidence for payables

Answer 2

Payables ledger and supplier statements

Confirmations from suppliers

Question 3

Most important tests for trade payables

Answer 3

Comparison of supplier statements and trade payable ledger balances

Question 4

other additional trade payable tests for further evidence-existence

Answer 4

External confirmation from suppliers

Supplier statements

cut-off-tests of purchases- for example ensures we don’t record transactions and then receive the next year so doesn’t acc exist and vice versa.

Question 5

other additional trade payable tests for further evidence- rights and obligations

Answer 5

External confirmation of suppliers

Reconcile balances at year end to supplier statements and verify the reconciling items

These tests also provide evidence over completeness and accuracy,valuation and allocation.

Question 6

other additional trade payable tests for further evidence- completeness

Answer 6

Review dispatch records to ensure purchases are in the correct period

Review unpaid invoices for liabilities not provided

Review supplier st reconciliations and ensure all outstanding invoices are accrued

Question 7

other additional trade payable tests for further evidence- Accuracy, valuation and allocation

Answer 7

Check closing accruals are calculated in accordance with accounting policies and are consistent

Check all provisions have been recognised

Question 8

other additional trade payable tests for further evidence-presentation

Answer 8

Ensure payables have supporting documentation and are recorded correctly.

Question 9

Do we usually need confirmations from suppliers

Answer 9

No, as usually we will just use supplier statements.

However, in some circumstances, confirmation is still necessary

Question 10

Circumstances where we need confirmations

Answer 10

Supplier statements not available/incomplete

Weaknesses in internal controls surrounding payables

Deliberate understatement suspected

There are unusual transactions

Question 11

Risks relating to NCL

(bank loans and provisions)

Answer 11

Incomplete, incorrect or insufficient disclosure

Incorrect calculation of finance cost

Question 12

Key sources to obtain evidence for loans

Answer 12

Bank letter and confirmation from other lenders

Cash at bank

Board minutes

Schedule of loans

Statutory books such as register of debentures

Client calc

Question 13

Examples of substantive tests for existence

Answer 13

Obtain confirmation from banks/other lenders

Question 14

Examples of substantive tests for - rights and obligations

Answer 14

Review lenders confirmation letters

Question 15

Examples of substantive tests for completeness

Answer 15

Review board minutes for evidence of new borrowings not recorded

Compare liabilities to prior year, check items not included agree to repayments of cash and inclusion as a current liability if reclassified

Question 16

Examples of substantive tests for Accuracy, valuation and allocation

Answer 16

Recalculate finance cost, agree interest to loan agreements.

Agree capital and interest to confirmation letters

Question 17

Examples of substantive tests for presentation

Answer 17

Check liabilities are correctly recorded as current/non-current referencing repayment dates