GO Audit 2

Audit Survival Kits

GOAF/G/2.ppt

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Audit Survival Kits

1. 2. 3. 4.

Plant, property and equipment Cash Revenues and Receivables Purchases and Payables

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Audit Survival Kits

Plant, property and equipment

1. Plant, property and equipment (PPE) - what you should understand before you start work..


Buildings often form the largest part of a PPE balance. How does the company pay for them? Are they leased or owned? Do we expect to see them on the balance sheet?

Does the company own its own buildings?

 

 

Are assets ordinary in nature - cars, trucks, mainstream IT equipment, office furniture? Are assets specialised with unique properties / valuation issues? Are assets purchased or acquired under a hire purchase / lease scheme? Are any assets custom built / constructed by the company?

How specialised are the companys assets ?

 

What PPE does the company own? What does the company use them for? How do they account for them?

 Does the client keep a Fixed Asset Register?  What evidence of ownership is available?

How does the company record what they own and how is it valued?

 How does the client control physical location / condition /

protection of assets?
 Is the carrying amount recoverable?  Are the PPE really capitalised assets (i.e. not repairs and

maintenance expense)?
 Have the assets been revalued or do they need to be revalued?

What is the companys process for acquiring / disposing of assets?

  

How does the process for authorisation work? How does the business control and monitor spending? Does the company have Capital Work in Progress (WIP) - if so how is this analysed, cleared and reviewed?

Does the Fixed Asset Register agree to the General Ledger? If not, does the client have a clear reconciliation? Does the balance include any assets held at third parties? Who decides the useful lives of PPE - how do they decide / assess them?

What are the companys controls over the PPE balance recorded in the accounts?

  

Document/Term PPE

Explanation The definition per IAS16 is Tangible items that (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and (b) are expected to be used during more than one period. Summary of PPE held by the company or its division. Likely to be split into categories such as Land and Buildings, Motor Vehicles, Plant and Machinery, IT and Fixtures and Fittings, showing additions, disposals, transfers and depreciations by each category. This should be used as your Lead Schedule where possible.

Hints and Tips

PPE Table/Analysis

Ensure b/f balances agree to the prior year file or financial statements and c/f balances agree to the general ledger. Seek explanation for any differences from the client. Additions, disposals, and transfers should be agreed to detailed company reports. These listings would then be used for testing, if applicable. For large companies it may be lengthy and take up many pages. Try to get an electronic copy as this may help with your testing. Ensure the total equals the amount in the General Ledger. There may be reconciling items between the register (which is a sub ledger) and the General Ledger. If so, obtain a reconciliation from the client and test these as appropriate based on materiality. We should consider scanning the fixed asset register for unusual dates, costs, descriptions, etc. We should inquire regarding anything that appears unusual. Just because the asset was in the books last year do not always assume it does not need to be looked at periodically discuss with Team Manager / EL. Look for correspondence with the relevant parties i.e.. Contractor / architect. Ensure that there is no further work to be invoiced after the completion certificate. Ask for the corresponding invoice to test existence. If relying on as a control, they should be authorised by an appropriate individual and you should look for their signature. Classifying an asset as an operating or finance lease can be found in IAS 17 par 8-19.

Fixed Asset Register

List of all assets held by the company. Will typically detail the date of acquisition, the cost, revaluation value (if applicable), accumulated depreciation, asset number and a description.

Title Deeds

Proof of ownership of an asset (usually a property)

Certificate of Completion

Third party evidence that confirms that a building has reached a specified stage of completion if it is in the process of being constructed.

Purchase Order / Requisition Form

Internal document authorising expenditure on an asset / expense. It is not evidence of the asset itself but is evidence of a control which we may rely on.

Operating Lease and Finance Lease

Two methods of leasing an asset, which although conceptually similar, are accounted for differently. Operating leased assets are not shown on the balance sheet whilst assets held under Finance leases are included as if they were the property of the company (IAS 17). Leases with the possibility to transfer ownership of the asset to the lessee at the end of the lease term (IAS 17). This is where a vendor sells an asset and immediately re-acquires the use of the asset by entering into a lease with the buyer. These transactions are often used to release cash as another form of borrowing and if the transaction is essentially a financing operation and the seller / lessee never disposes of the risks and rewards of the asset, the asset should remain on the balance sheet and no disposal shown.

Hire Purchase

These are accounted for as if they were finance leases.

Sale and Leaseback

This is a complicated area and there are other ways to account for the transaction, other than the one mentioned here. Ask your EL / Team Manager for advice. This can also be found in IAS17 par 58-66

Document/Term Depreciation

Explanation IAS16 definition is the systematic allocation of the depreciable amount of an asset over its useful life (see below). Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value (see below).

Hints and Tips The most common method is straight line depreciation this is where the cost is spread equally over the useful life of an asset. Other permissible methods include:
diminishing balance - which is where higher amounts of depreciation is

charged in the earlier years of the assets life, and the units of production method results in a charge based on the expected use or output. Estimated Residual Value This is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life (IAS 16 par 6). This means that an estimate is made of the value of the asset at the end of its useful life, but expressed at the price an entity would receive currently from disposal of the asset (considering the age and condition expected at the end of its useful life).

Useful Life

This is the period over which an asset is expected to be available for use by the company or the number of production or similar units expected to be obtained from the asset by the company (IAS 16). Test performed by auditors to see if the depreciation expense is in line with expectations and to confirm the reasonableness of the income statement depreciation charge. Where the company has long term relationships with suppliers they often let suppliers use patent / trademark protected or specialist moulds and cutting tools to machine parts accurately. These will be held by the supplier for the duration of the supply relationship, but are owned and accounted for by the company. Adjustments may need to be made to account for purchases and asset sales made late in the year, depreciation methods, etc.. Also, you need to take into account the fully depreciated assets. Where off site moulds and tools are material check that they exist (circularise), check that they are at suppliers with whom we still trade, and that the cost / depreciation records have been maintained.

Depreciation Reasonableness test (Proof in Total) Moulds and Tooling

Capital WIP / AICOC

Capital WIP (work-in-progress) and AICOC (assets in the course of construction) are terms used for assets that are still in the process of being built. These items do not meet the definition of a fixed asset according to IAS 16 and therefore, they should not be depreciated until they are completed and ready to use. Upon completion, assets should move from WIP to their appropriate category by means of a transfer, which is usually a different line on the PPE table.

Capital WIP / AICOC should not be depreciated, but should be monitored so they are transferred to the correct category at the correct time. Watch out for assets that should be transferred out of WIP and so should be depreciated as the client may not do this on a timely basis. Watch out for aging of capital WIP - sometimes unrecognised overspends get moved around the Capital WIP ledger for years without ever getting transferred out. This is one of the situations which may indicated that the lease is finance leases. You have to consider substance of the transaction over form discuss with Team Manager / EL.

Option to purchase

A provision allowing the lessee to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable and that exercise of the option appears, at the inception of the lease, to be reasonably assured (IAS 17 par 4).

Assertion Valuation Are PPE held at the correct value? Are revalued assets supported by proper valuations? Have assets affected by a permanent diminution in value been written down to an appropriate carrying value?

What are the common risks? Assets are held in the Balance Sheet at inappropriate value Usually, but not always, this means overvalued. Common causes: Market value / value in use has become impaired Changes in technology / market Physical damage Capitalisation of inappropriate costs in the asset - e.g. unattributable overheads or interest, repairs and maintenance costs, addition of enhancements / refurbishment costs without removing original cost of item being replaced Depreciating over wrong life particularly where clients go on a re-lifing hunt to reduce depreciation charge

Fraud Risk Assets intentionally included at higher Net Book Value (NBV) to inflate asset balance. Assets sold to staff at balances below MV. Improper capitalisation of expenses as costs of PPE to increase the value of assets in the books and records or to inflate profits. (See PwC Audit 4260 Appendix 5 ).

What shall I do about it? PPE should initially be measured at cost, which should include only those costs directly attributable to bringing the asset into working condition and location for its intended use (IAS 16 par 7 and 16). Directly attributable costs include (IAS 16 par 17):  Costs of employee benefits arising from the construction or acquisition of the item of PPE.  Costs of site preparation.  Initial delivery and handling costs.  installation and assembly costs;  Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition.  Professional fees. If a business unit to which the asset belongs (and which does not have a readily ascertainable market value) makes consistent losses discuss impairment risk with EL / Team Manager. If additions include refurbishment costs or significant repairs - discuss suitability for capitalisation with EL / Team Manager and enquire as to how the cost of those elements of the asset being replaced have been accounted for. Discuss and agree to supporting evidence - technical reports, maintenance schedules and prior profits / losses on disposal - applicability of depreciation life. Alternative accounting rules become effective where the cost of an asset is replaced by a market value or current cost of the asset. To prevent cherry picking of assets to be revalued, IAS16 states that if revaluation is to be adopted it must be applied to all assets in an individual class and valuations must be kept up to date at current values (IAS 16 par 31). The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Frequent revaluations are unnecessary for items of PPE with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every 3 or 5 years (IAS 16 par 34). Spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment (IAS 16 par 8).

Should the PPE be revalued?

Assertion Valuation (continued) Are PPE held at the correct value? Are revalued assets supported by proper valuations? Have assets affected by a permanent diminution in value been written down to an appropriate carrying value?

What are the common risks? Inappropriate Useful Life of the assets The asset is impaired

Fraud Risk Intentionally introducing big bath provisions, i.e. overprovisioning, to improve reported return on capital employed (ROCE) in subsequent years. Manipulation of PPE valuations, e.g. intentionally including assets known to be impaired at an inflated value (see PwC Audit 4260 Appendix 5). Unauthorised expenditure misclassified as fixed assets to conceal amounts.

What shall I do about it? IAS16 par 51 states that the Useful Life should be reviewed at least at each financial year end and if expectations differ from previous estimates, the change should be accounted for as a change in an accounting estimate is accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. Compare assigned Useful Life used by the client to those commonly used in the industry It is not a requirement that there is a formal impairment review annually, only when there is an indication that assets might be impaired (IAS 36 par 9). Examples of such indicators are as follows (IAS 36 par 12):  Significant decline in a PPE items market value during the period  Evidence of obsolescence or damage to the asset  Significant adverse change in the business or market e.g. entrance of a major competitor  Significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future  Market interest rates or other market rates of return on investments have increased during the period, affecting the discount rate used in calculating an assets value in use  The carrying amount of the net assets of the entity is more than its market capitalisation.  Evidence is available that the economic performance of an asset is, or will be, worse than expected. There are many more, ask your Team Manager if unsure. In order to review for impairment the activities of the company need to be divided into Cash Generating Units (CGUs) (IAS 36 par 65). The idea is to group assets together in order to assess their value and adjust only if there is a material change in value. The categorisation of CGUs is very judgemental, discuss with your Team Manager / EL..

Assets may carry significant unrecorded obligations:  Clean up costs (dismantling and removing the item)
 Environmental obligations (restoring of site)

For clean up and environmental obligations consult EL / Team Manager and external knowledge sharing tools for industry awareness.

Assertion Accuracy Have the additions and the disposals been recorded accurately? Has the depreciation been correctly calculated?

What are the common risks? Depreciation has been incorrectly calculated.

Fraud Risk Schemes involving depreciation, e.g. unusually slow depreciation of PPE (see PwC Audit 4260 - Appendix 5).

What shall I do about it? Review process of allocating assets lives, and for inputting information on system. Perform a proof in total on depreciation expense (see other things to look out for section.) and seek explanation of differences. Differences most probably will be due to timing of additions / disposals in the year, and assets fully written down. Re-perform profit/loss calculations for a sample of material disposals.

Profit or loss on disposal may not have been correctly calculated.

Cut-off Are transactions recorded in the correct period?

Additions or disposals may not have been recorded in the correct period.

Test a sample of assets to invoices or sales receipt for confirmation of inclusion in correct year. If there is an adjustment dont forget this will also affect depreciation, profit / loss on disposal. Used assets written out of the books. Costs that may be capitalised are as follows (IAS 16 par 16):  The purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.  Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.  The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.  Interest on any capital the company borrowed in order to finance the production of the asset (since directly attributable to the production of a qualifying asset) and for the period of production (IAS 23 par 11). Review of controls around capitalisation within the company to determine if comfort may be placed on them. Inspection of Repair and Maintenance accounts for unrecorded capital items. Confirm existence of assets held by third parties and check that they are at suppliers with whom the company still trades. Review contracts / agreements for the acquisition, production or construction of an asset to identify any possible unrecorded commitments.

Completeness Have all PPE been recorded in the financial statements?

The client has not capitalised all of its capital expenditure. Potential reasons include:
 Capital repairs omitted.  Capital commitments omitted.  Not all assets included on register.  Assets held at third party sites.

Assertion Rights & Obligations Does the company have valid title to all PPE at the balance sheet date? Is it responsible for substantially all the risks and is it entitled to all the rewards of ownership therefrom?

What are the common risks? Ownership rights are compromised:

 Assets subject to unrecorded mortgage / securitisation.

Fraud Risk Intentional inclusion of assets belonging to third parties. Intentional suppression of known obligations to flatter reported financial position.

What shall I do about it? Inspect ownership documents such as vehicle registration documents, title deeds and lease agreements. Test additions to invoices. When testing title deeds and bank letters look for evidence of unrecorded mortgages / security. Where assets are held on third party sites confirm that the client has reasonable access and can remove / sell the asset if necessary.

 Assets on third party sites may have compromised physical access.

Enquire of management what leased assets exist. Review terms of leases for correct classification between an operating lease and a finance lease. IAS 17 details how to account for leases. The main two types of leases are:

 Assets may be the subject of complex leasing and financing structures effecting beneficial ownership.

 Finance leases are where the substance of the transaction is as though the company has purchased the asset. a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. (IAS 17 par 4)

Consequently the asset is included as a fixed asset of the lessees company.

 Operating lease - is simply a lease other than a finance lease In other words it does not pass substantially all the risk and rewards of ownership to the lessee. A significant amount of risk therefore must remain with the lessor, for example the lessor is responsible if the asset breaks down and needs repairing. This lease is not included on the balance sheet, but the lease payments go through the profit and loss, on a straight line basis, even if the payments are not made on this basis (IAS 17 par 33).

For classification of leases, you must also look at other factors such as:  Contractual lease period
 Cancellation provisions  Renewal options  Rights and obligations of each party

Assertion Existence/ Occurrence Do the PPE exist at the balance sheet date?

What are the common risks? Assets detailed on the register may no longer exist (sold, stolen, scrapped ) or may not have existed in the first place.

Fraud Risk Theft of desirable assets. Artificial inflation of assets by fake additions. (see PwC Audit 4260 - Appendix 5).

What shall I do about it? Test controls over restriction of access to PPE. Obtain the fixed asset register and physically inspect some of the assets listed on register. Enquire of management whether they do a physical inspection of PPE. Do the assets have a means of identification? For example a sticker with a number on that refers to the fixed asset register. If not - how does management know which asset is which? Test a sample of additions back to invoices and also obtain some invoices of fixed asset additions and verify that they have been entered into the register.

Repairs and Maintenance expenditure is capitalised inappropriately. Presentation and Disclosure Have PPE been properly classified, described and disclosed in the financial statements? Balances have not been properly classified and disclosed in the financial statements.

Review Fixed Asset Register for indication of inappropriately capitalised assets.

The main disclosures for each class of PPE are: - the measurement bases used for determining the gross carrying amount; - the depreciation methods used; - the useful lives or the depreciation rates used; - the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; - a reconciliation of the carrying amount at the beginning and end of the period; - the existence and amounts of restrictions on title, and PPE pledged as security for liabilities; - the amount of expenditures recognised in the carrying amount of an item of PPE in the course of its construction; - Information about revalued assets. These are not the full disclosures. Ensure all the disclosure requirements of (IAS 16 par 73 to79) are met by completing the IFRS Disclosure Checklist. Trace balances from Register to Financial Statements / Reporting package (in case of consolidation) and ensure they have been appropriately allocated.

Examples of analytical procedures

Below are examples of types of analytical procedures that could be considered when developing testing strategies. This is not a complete list. Additional considerations should include: industry specific analytics, the rigor of the analytical procedure for the level of assurance desired, and also the relevant assertion for the test objective. Property, plant and equipment Fixed assets by class of asset Disaggregation of acquisitions between expansion and replacements: - Average cost of new plant per square foot to historical costs of plants per square foot - Ratio of replacements to disposals Relation between acquisitions and disposals Repairs and maintenance expense by class of asset, location, business unit Reasonableness test of depreciation by dividing average balances of plant and equipment for each class by the average useful lives Depreciation expense by period (monthly, quarterly) and by class of asset
PPE Table Cost Opening balance Additions Transfers Disposals Closing balance Depreciation Opening balance Charge in year Transfers Disposals Closing balance Net Book Value y y y (y) y zc agree prior year depreciation reasonableness test corresponding transfer out test to fixed asset register agree to GL

Depreciation Reasonableness example 1:

Opening balance (cost) x x x (x) x agree prior year test to invoice test corresponding transfer out test to bank and sales voucher agree to GL - Opening fully written down assets Adjusted opening balance [a-b] Closing balance (cost) - Closing fully written down assets - Significant additions year-end + Significant disposals year-end Adjusted closing balance [d-e-f+g] Average cost [(c+h)/2] @ depr. Rate e.g. 0.33 = Expected amount [i x j] Actual Depreciation Compare Actual to Expected [l k] a b c d (e) (f) g h i j k l

Depreciation Reasonableness example 2: Opening balance (cost) + additions - disposals Adjusted opening balance @ depr. Rate e.g. 0.33 = Expected amount [d x e] Actual Depreciation a b (c) d e f g

Compare Actual to Expected [g f]

Other things to look out for..



Asset descriptions will often be complicated, and may be based on their asset number. Dont be afraid to ask what a particular asset actually is. An excess of assets held on the balance sheet at zero NBV may indicate a too aggressive depreciation policy. Due to the large number of individual items of expenditure on large PPE projects such as plant construction it is easy for project managers to lose unwanted transactions such as - fraudulent payments, misspent sums or overspends from other small projects. Most businesses control this by breaking down large projects into a series of smaller separately controlled elements. These should be regularly monitored against budget by more senior people and data such as aging and transfers from other projects highlighted on exception reports. Ensure you are comfortable with either the processes involved to avoid this, or with the level of testing which you are performing

 

Audit Survival Kits

Cash

2. Cash - what you should understand before you start work..

 Do they operate in more than one country / currency?

What currencies does the company use?

 Do they buy or sell goods or services abroad?  Is there a bank account for each currency? If not, why not?  Is the location and currency of bank accounts consistent with

business activities?
 

Have you asked for the latest list of bank accounts? Have you compared the list to last years to ensure none are being left off. Ensure someone on your team is sending out the bank confirmation letters. Is the number of bank accounts and banking relationships consistent with business activities? How well controlled are these bank accounts? What are the companys policies for opening/closing bank accounts? Is the use of any of the cash restricted? Are there any cash equivalents?

What is the nature and timing of cash inflows / outflows generated by the companys business activities?

What bank accounts do they have?

   

 What is the volume of transactions being processed?  Does the company have complex treasury / banking

arrangements and processes? If yes have these been discussed with EL / Team Manager and do you understand them?

What is the volume and complexity of transactions being processed?

 Do you understand how banking transactions are entered into

the accounting records?



Do you understand how cashbooks, bank reconciliations, general ledger accounts, and management review and reporting link together? consistent with business activities?

 Is the volume and complexity of banking arrangements

 Have you gained an understanding of the underlying systems

and key controls - e.g. consider prior year deficiencies, perform inquiries to develop understanding, understand and evaluate key controls, consider segregation of duties especially between handling of cash, recordkeeping and access to general ledger?

Document/Term Authority to disclose

Explanation

Hints and Tips

Permission granted by the client to the bank to release information to the auditors. This should Although printed on the company paper, authorities must be sent out by be printed on the company headed paper and signed by an authorised signatory on the us and replies sent direct to us. account. The letter should be kept by the banks year to year, but they may ask for another letter if it is lost or misplaced. Once the authority is signed by the client, we must keep a copy on file in the event that the bank requests a copy letter to be sent to them. Bankers Automated Clearing Service & Clearing House Automated Payments System. Understand how items get onto the BACS/CHAPS list - how would the Methods of making payments directly from an account electronically. This is common in most client pick it up if unauthorised payments were added? companies, and will usually be initiated from a dedicated machine. Payment will usually be authorised with a password. Although the transfer may show as one movement on the bank account, breakdown of the balance will be available. Control is usually exercised by a senior manager / director signing the BACS / CHAPS list prior to submission to the bank for payment. There is a rebuttable presumption that bank confirmations covering balances and facilities shall be requested from all financial institutions where the client has a banking relationship, unless the client itself is a bank or similar financial institution. The confirmations should cover the deposit account balance(s) and any facilities, including inquiring whether any facilities exist at the institutions at which the company has a deposit account where the company has not identified a facility. If bank confirmations are not sent, or are sent on a selective basis, the rationale shall be documented on the audit file. The Standard Form to Confirm Account Balance Information with Financial Institutions (i.e.., deposit account balance confirmation) provides for the confirmation of deposits (cash accounts) and loan account balances only. A separate confirmation may be required to confirm facilities information. Ensure you read and understand the contents of the confirmation when it is received. Discuss with your reviewer if you do not understand anything. Do not let the client send out the letter - we must physically mail the confirmation ourselves (ISA 505.30). We must receive the original letter in the office, direct from the bank and not rely on fax replies (PwC Audit 5174). If this is not feasible, the fax or electronic confirmations when followed up by a confirming telephone call with the confirming party, will be acceptable, if such follow up is clearly documented in the working papers (PwC Audit 1541). Update the progress of confirmations by keeping a control sheet detailing date sent, received and any communication. A bank confirmation control sheet is available in Template Manager. Keep any contact numbers you obtain on the MyClient file for next years audit. It is the cash book figure that is taken to the Balance Sheet as this is the real time position of the company. When looking at uncleared cheques / receipts - how can we be sure they were actually issued / received prior to the period end? Could the cash book entry have been back dated? Watch out for items (especially payments) in the bank statement not in the cash book. Does this mean payments are being made which did not go through conventional authorisation?

BACS & CHAPS

Bank Confirmation

Bank Reconciliation

Performed at regular intervals (weekly / monthly) to ensure that the difference between the bank account balance and the cash book balance can be identified and explained. Most common reconciling items are unpresented cheques (cheques issued and entered in the cash book pre-year end which hit the bank account post-year end), and uncleared receipts (receipts entered into the cash book pre-year end which arrive in the bank account post year end). While many payments are automated - BACS, CHAPS, automated cheque runs, etc. - most businesses still have a manual cheque book for one off and emergency payments - who keeps this and how are payments controlled and recorded? An inability to reconcile bank accounts or old items on the reconciliation is often an indicator of problems in the core accounting and business processes, or it may indicate a potential fraud risk- if this situation comes to your attention discuss with EL / Team Manager.

Document/Term Cash Book

Explanation The clients independent record of transactions going through the bank account. Usually electronic, the cash book should have sufficient information to enable the company to establish their net cash/overdraft position at any point in time. All transactions other than bank charges and interest should be posted to the cash book independently of the bank statement rather than being picked up from it.

Hints and Tips Cash book may be either independent of the general ledger or part of the account detail for the relevant account within it. If separate make sure reconciled cash book balance agrees to the cash figure in the general ledger. Make sure a bank account exists for each general ledger account forming part of the cash total in many high volume /multi location systems complex G/L posting routines make this harder to do than it sounds! Be cautious of manual cheques what are the controls over them? Is it unusual for there to be a manual cheque raised? A break down of the amounts submitted in a single batch is recorded in the paying in book. Details of covenants will be on the loan agreement held by the company. Compliance is usually measured at agreed dates quarterly, six monthly or annually.

Batch Payment

When making deposits (i.e.banking cash/cheques), funds are often submitted as one batch, and will show up as one balance on the bank statement. Conditions / ratios agreed as part of a loan arrangement which must be kept by the company in order to continue borrowing. Many variations but usually based in some way on interest cover, cash flow and net assets. Breach of covenants can lead to withdrawal of loans / credit facilities and may lead to going concern issues. We need to consider whether the client meets the covenants at the balance date, whether it has breached them during the year and whether it is likely they will breach them in the foreseeable future. An instrument having monetary value or recording a monetary transaction. These are tools used by companies to manage their risk. Many different types but common examples include forward contracts / options (agreement to buy or sell something - usually a foreign currency - at an agreed price/rate at a specified future date), letters of credit (post dated commitments to pay backed by the bank), bank guarantees (where the client guarantees a third party such as an overseas bank, a party to a contract or customs and excise an agreed amount and the bank commits to honour the guarantee), and SWAPS see below. A common type of financial instrument. Contractual and accounting arrangements are often complex and varied. Basic concept usually involves managing risk on long term borrowings by swapping your loan for one with more desirable characteristics - e.g. going from a fixed interest rate to a variable one (fixed to floating) or vice versa. Similarly companies often move borrowings from one currency to another. SWAPS are attractive because companies can alter the profile of their borrowings without having to re-organise the entire loan. They are organised by entering into a SWAP contract with the bank who acts as the counterparty.

Covenants

Financial Instruments

Ensure someone on your team explains the purpose of each instrument you look at. If you identify financial instruments you do not understand, were not expecting or which do not make sense in the context of the clients business (either by nature or by volume of activity) discuss with EL / Team Manager.

SWAP

Banks should confirm the existence and terms of SWAPS in their replies to us. Discuss with EL / Team Manager.

Document/Term Banking Relationship

Explanation A banking relationship exists where the client has one or more cash accounts and/or any facility with a financial institution. Cash accounts also include accounts that are swept or zeroed out at the end of each day. Facilities include mortgage debt, lines of credit, compensating balance arrangement (see definition below), and contingent liabilities including guarantees. Under PwC Audit Guide, there is a rebuttable presumption that banking relationships will be confirmed. (PwC Audit 5171.02)

Hints and Tips A substantial number of major financial institutions, and the majority of smaller financial institutions will not have the capability of confirming deposit account balances and facilities information using one confirmation. Discuss with more senior engagement team members the need to send separate confirmations for deposit account balances and facilities information.

Cash equivalents

Cash equivalents are short term, highly liquid investments that are both (a) readily Ensure the classification of cash equivalents is appropriate. convertible to cash, and (b) so near to their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of three months or less qualify as cash equivalents. Examples of cash equivalents are Treasury Bills, commercial paper, and money market funds. Cash overdrafts may be classified as bank overdrafts, Bank overdrafts represent credit balance in cash accounts as a result of total checks honored by the bank without sufficient funds in the account to cover them. Accordingly, bank overdrafts (other than those that arise in connection with a "zero-balance" or similar arrangement with a bank) represent short-term loans and should be classified as liabilities regardless of whether positive cash balances exist in other accounts with the same bank. Banks and other financial institutions often require companies to maintain a minimum cash balance in checking or savings accounts. These minimum balances are referred to as compensating balance arrangements. Cash balances that have restrictions on its availability or use. Restricted cash may include: sinking funds, cash balances of others, compensating balances, etc. Ensure that credit balances in cash are not being offset against other debit balance cash accounts unless the legal right of offset exist. Discuss presentation with more senior members of the engagement team.

Cash overdrafts

Compensating balance arrangement Restricted cash

Consider whether the company appropriately disclosed the existence of any compensating balance arrangements.

We should review loan agreements, minutes, loan agreements, and other relevant documents to determine if there are any restrictions on the use or availability of cash. Gain an understanding of the companys authorization process for wire transfers.

Wire transfer

When funds are remitted by wire transfer, no currency or checks are involved. The company provides details of the transfer to its bank, which then executes the transaction. Where cash is received via a wire transfer, the company will typically receive some form of detail of the deposit from the bank.

Assertion Completeness All bank and cash balances have been recorded in the financial statements.

What are the common risks? All of the bank accounts held by the company may not be included in the General Ledger, i.e. there may be bank accounts which the client has accidentally omitted or not told you about. This can result in cash balances which risk being misappropriated, or borrowings / commitments being excluded. All transactions may not have been included - especially cheques, financial instruments and other commitments.

Fraud Risk Funds may be moved into private accounts / business accounts used for personal expenses. Borrowings may be hidden.

What shall I do about it? Tick off the bank accounts included in the completed bank letter to the General Ledger. Confirm, using the bank letter, that those accounts which no longer exist have been closed in the year. The letter should clearly state which accounts have been closed. The bank reconciliation will not identify items which are excluded from both the cash book and the bank account at year end - for example post dated cheques, forward contracts / letter of credit due after the year end date. Review of bank confirmations and statements post year end should identify these items.

Cut off Bank and cash transactions have been recorded in the correct accounting period. Bank and cash balances have not been distorted by window dressing.

Transactions after year end may not be excluded from the year end cash balance. Transactions before year end may not be included in the year end cash balance. The client may write cheques to be paid out prior to the year end and then delay sending them out until post year end, thus manipulating the final cash position, window dressing. The cash books may have been kept open longer past the balance sheet date in order to receive and record more deposits.

Suppressing payments made in order to flatter the financial position of the business.

Test items in reconciliation to ensure they are accounted for in correct period by tracing to the relevant documentation. Scan cash book in weeks prior to year end and weeks post year end to ensure large balances are included in correct period, or correctly recorded in the reconciliation. If there are cheques written prior to the year end, ensure they clear within a reasonable amount of time post the balance sheet date. Ensure large transfers between accounts / related companies prior and post year end appear in the correct period in both accounts, and are not inappropriate reconciling items on one of the accounts.

Cash may be double counted in more than one bank account

To ensure that there has been proper cut-off at year-end, we should review significant transfers of funds between the companys various bank accounts near the balance sheet date.

Assertion Rights & Obligations The company has title to bank and cash deposits, and overdrafts and shortterm borrowings represent obligations of the company, at the balance sheet date.

What are the common risks? Insufficient funds / breach of overdraft limits - going concern implications.

Fraud Risk Misstating balances in order to achieve covenant compliance or obscure going concern issues. Off balance sheet finance - especially showing proceeds of with recourse borrowings as net cash.

What shall I do about it? Look for overdraft limits on the bank confirmation and compare to current balances. Flag up any irregularities with your reviewer.

Misuse of offset rules for deposits and overdrafts. Inclusion of accounts belonging to other parties - for example pension funds, employee share trusts, related parties - as company funds. Restricted cash balances - there may be some balances that can only be used for a specific purpose or where access is restricted common examples include:
cash in foreign territories with restrictions on payments overseas; cash held in escrow or deposits for rental properties.

See Presentation and Disclosure below. One for one matching with bank confirmation details.

How does the client distinguish between its own money and that belonging to others?

Details of the restricted balances (such as amounts in countries where removal of cash is currently illegal) must be obtained from the client. Consider whether this will affect the cash flow projections of the company. These amounts should be disclosed - discuss with EL / Team Manager. Review debt agreements, minutes of directors meetings and inquire of management regarding cash restrictions.

Use of debt factoring / securitisation programmes where cash receipts are in substance borrowings - see accounts receivable.

If any securitisation / debt factoring schemes are identified discuss with EL / Team Manager to confirm accounting treatment. Overstating cash position Cash has been misappropriated. Theft of entitys cheques, tampering with entitys cheques Ensure all accounts which are detailed by the client are found on a confirmation and check the balances. Check that all general ledger accounts forming part of the cash balance are backed by an actual bank account. Confirm through review of documentation that items on bank reconciliation actually exist. Look in particular for situations where the reported cash position is significantly better than the actual position - do you understand the reasons for the difference and do they intuitively make sense? Understand / evaluate procedures for cash counts / related controls - consider attendance / sample counts.

Existence/ Occurrence Bank and cash exist at the balance sheet date.

The bank account / balance may not exist.

Reconciling items on bank reconciliation may not exist.

Petty cash / cash in hand is usually immaterial - but for businesses with large numbers of branches such as retailers this is not always the case.

Assertion Presentation and Disclosure Bank and cash balances have been properly classified, described and disclosed in the financial statements. The amounts reported in the financial statements are in agreement with the accounting records.

What are the common risks? Cash amounts have been netted off. Overdrafts and positive balances are not allowed to be netted off against each other in the Financial Statements. Any overdraft balance should be shown as a short term creditor balance. The only exception to this is where a right of offset has been granted by the bank. Therefore, the bank will view all the companys accounts on a net total basis and charge interest accordingly. Cashflow presentation may be inaccurate or incomplete

Fraud Risk Use of set off where no such right exists for the purpose of misrepresenting the financial position of the business.

What shall I do about it? There will usually be a right of offset detailed in the bank letter. If not and there has been offsetting, check with the bank confirmation department first. Confirmations sent from the bank are often incomplete.

In accordance with IAS7, cash and cash equivalents should comprise cash on hand, demand deposits, and short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Incorrect figure may be quoted by the client to inflate cash position. Clients may create accounting muddle in order to obscure misstatements / misappropriation in bank accounts. Potential to manipulate cash position by pushing balances either side of the year end. Review the reconciliations to ensure that they are being performed correctly, on a timely basis and are reviewed regularly. Ensure balances are agreed to the bank confirmations and cash book. For any unusual or persistently uncleared items investigate them carefully. Be cautious about accepting vague explanations for reconciling items - e.g. timing differences . Look particularly carefully at items appearing on the bank statement not in the records - who authorised them? Where the accounting appears muddled be aware that weak accounting heightens fraud risk. In particular look carefully at situations where the end result is a reported cash position significantly better than shown in the underlying bank accounts. It is useful to look at the final overall cash position and mentally check it is consistent with what you have seen in detail and your understanding of the performance of the business - e.g. did you really expect them to have a net 2 million in cash or were you expecting a net overdraft? Re-cast all calculations provided. Errors are more common than you would expect!

Valuation Bank and cash balances have been accurately determined, summarised and recorded and any resulting valuation adjustments are appropriately recorded.

The cash balance used in the trial balance / financial statements does not accurately reflect transactions / balance. This may be due to:
an inability to reconcile the bank balance to the cash book and / or the general ledger balance; the bank reconciliation being performed incorrectly.

Financial instruments may not reflect actual contractual rights and obligations. For example, financial instruments may be recorded as an hedging instrument when in fact there is no relationship with an hedged item.

For material items read the agreement.

Assertion Valuation (continued) Bank and cash balances have been accurately determined, summarised and recorded and any resulting valuation adjustments are appropriately recorded. Valuation (continued) Have the foreign currency balances been translated at the correct amount? Have financial instruments been treated correctly?

What are the common risks? If amounts on deposit are material consider whether the bank concerned represents a credit risk or could be an undisclosed related party especially if the bank used is small, obscure, based in a less regulated territory, or does not appear consistent with the nature of the companys business activities. Inquire whether the client has a written treasury policy limiting the amount deposited with any single bank or requiring a minimum credit rating. Foreign currency translation Foreign currency balances may not be converted at the correct exchange rate. For forward contracts / currency options consider / consult over: Whether they are hedge transactions; and How to account for differences between the forward / contract rate and the year end rate. Where currency SWAPs / borrowings have been used look carefully at the accounting for exchange losses - clients sometimes switch to low interest rate currencies and assume that hedge accounting for exchange gains / losses can be used. Where the currency borrowing exceeds net investment in the related territory then exchange gains / losses should go to P&L (IAS 39). For financial instruments and derivatives the fair value of the instrument may be different from the face value. If financial instruments are new, complex or if there are borrowings which are either fixed rate or foreign currency consult with EL / Team Manager. Where SWAPs (and other financial instruments) have been terminated early it is common for significant surpluses / deficits to arise (generally referred to as being in or out of the money). Discuss accounting treatment with EL / Team Manager - especially where significant profits arise or significant losses are being deferred (usually over the life of the original SWAP now terminated). If amounts on deposit are material consider whether the bank concerned represents a credit risk or could be an undisclosed related party especially if the bank used is small, obscure, based in a less regulated territory, or does not appear consistent with the nature of the companys business activities. Enquire whether the client has a written treasury policy limiting the amount deposited with any single bank or requiring a minimum credit rating.

Fraud Risk Significant deposits with small banks controlled by related parties

What shall I do about it?

Use of derivatives beyond authority of finance team or with a greater risk than required for the effective running of the business. Common examples include over committing on forward contracts and options, and off balance sheet finance arrangements. Significant deposits with small banks controlled by related parties.

Check the conversion rate to PwC Exchange rate data base, via the Portal or other reliable sources.

IAS21 par 23 requires that the client should translate its foreign currency monetary items (e.g. cash and bank balances, loans, debtors and creditors) at the year end using the closing rate. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit and loss in the period in which they arise (IAS 21 par 28). If in doubt, ask your Team Manager! For all of these situations consult with EL / Team Manager and consider the use of the Treasury Support Group.

Other things to look out for..

Cash is material by nature. Treasury operations can be complex - we have specialists to help so ask if you do not understand. Banking arrangements can be complex - we have specialists to help so ask if you do not understand. Fraud is a risk - misappropriation and misreporting. Third party confirmations are critical. Review minutes, bank agreements, inquire of management as to whether there are banking arrangements with related parties (parent company and subsidiary, subsidiaries of a common parent, affiliates, enterprise and its principal owners, management or members of their immediate families). Remember - even if bank transactions such as guarantees, forward contracts and security arrangements do not change the reported numbers they will often be important for disclosure. Sample bank Reconciliation
Balance as per Cash Book Bank charge not in Cash book Outstanding cheques not yet cashed Cheque run made pre year end not yet on bank statement Cheques received from customers not on bank statement Balance per Bank Statement 20 (2) 20 10 (12) 36

    

Audit Survival Kits

Revenues and Receivables

3. Revenues and Receivables - what you should understand before you start work..
Delivery of a specific service? Provision of a facility?

How are these sales measured?

By units? Quantity / weight / volume? Level of inherent risk? e.g. High / low volume of transactions, nature client base (blue-chip or high risk?), domestic or export (high risk territories?), into channels or direct to market (reseller risk / channel stuffing)?

What are the characteristics of the sale?

Are there any key risks?

Do the transactions have complex structures? e.g.: Rebate schemes, arranging lease finance for customers, contract accounting, multi-part sales, license revenue, deferred payment arrangements, subscription sales?

What does the company sell and why do people buy it?
Do you understand how this sale has made its way into the ledger?

Do you understand how:  The order got input into the system?  Price, quantity and availability of goods / service resources was agreed and checked?  Key files got accessed / updated - e.g. inventory, customer standing data, price?  Accounting entries were initiated and processed?  The transaction was authorised / reviewed?  How general ledger accounts are protected from unauthorised adjustment? Level of control risk? e.g.: Consider prior year deficiencies, understand companys systems and key controls? Clients history and CAKE? e.g. High volume of credit notes and disputes, poor accounting?

Where is risk concentrated?

Is risk concentrated into a few large balances or high volume of small ones or to a specific type of customer?

Document/Term Invoice

Explanation Confirmation of goods / service delivered and bill for payment. Usually includes date, sales order number, price, description and quantity of goods / service, delivery address and date, VAT details, total owed and customer reference / contact details Document reducing the amount owed by customer - should be authorised by someone in a supervisory capacity. Usually caused by disputes or errors on the original invoice (e.g. wrong price). If arising in large quantities can indicate problem with underlying system.

Hints and Tips Just because it is invoiced doesnt always mean it is revenue, was delivered or will be collected. Make sure you read the companys revenue accounting policy. Credit notes matter - they represent giving money away Need to establish what are your expectations concerning the number expected what happened in the past? If you start seeing too many of them for no apparent reason - consult.

Credit note

Debit note

If customer is disputing an invoice and considers vendor has been slow in issuing a credit note some will send in a debit note which is a demand from the debtor to the vendor for a rebate and acts as a prompt (and to manage the customers internal book keeping). Payment by a customer. Most of the time each payment can be broken down by specific invoice and this is shown in detail on a Remittance Advice. On occasion customer may pay a lump sum not linked to invoices - a payment on account. It can be an agreed practice but it can also indicate an accounting muddle, customer financial difficulties or a dispute. Cash receipts may be received via a cheque or automated funds transfer. Any other adjustment to the ledger. Common reasons include customer rebate schemes, forex differences on settlement and prompt payment discounts. Adjustments which are one-offs should be rare and should be authorised by senior personnel Agreeing with a finance company that they will purchase some of the debts, or otherwise lend money (usually between 75-90% of invoice value dependent on risk) against security of accounts receivable. Schemes and related accounting are complex - key issue is recourse - who pays if the debt goes bad? This is where a number of customers, with outstanding balances in the accounts receivable account, are sent a request to confirm their balance owed (or individual invoices owed) to the company in order to test existence and rights & obligations. The use of confirmations is required to be performed on every audit unless certain criteria are met. If, accounts receivable confirmations are not requested, unless receivables are clearly immaterial the rationale shall be documented on the audit file, with a link to the alternative audit work that has been performed to address the existence of accounts receivable.

Many clients do not enter them in their books - so ask how they deal with them.

Cash receipt

In aged debt analyses many clients put these against the oldest invoices - it flatters the aging and masks old outstanding debts- ask how they treat them? Just because it is paid does not necessarily mean it is revenue. These occur at the individual account balance level and as part of the ledger reconciliation.

Adjusting journal entries

Debt factoring / securitisation / discounting

This is usually a form of borrowing - if in doubt consult EL / Team Manager.

Debtor circularisation/ confirmation

The letter requesting the confirmation must be on the company letterhead, signed by the client but the audit team must send out the confirmation themselves. Alternative procedures are required when no response is received. When we send confirmations as of a date prior to the balance sheet date, we should consider the need to obtain further audit evidence for the remainder of the period discuss with EL / Team Manager.

Document/Term Side letters

Explanation Agreements made with customers after the original agreement is entered into which tend to modify the material terms of the original contract

Hints and Tips The existence of side letters may indicate incorrect revenue recognition (IAS 18). If you become aware of this type of agreements consult with EL / Team Manager Rebates can pop up as assets or liabilities depending on the scheme. Make sure you understand at the start:
 The timing of the adjustment and matching to the related sale  How debtors will be recovered / liabilities paid.  How the client tracks the balance transaction by transaction the client may lose track of individual and specific components of rebate balance and end up with estimate (or just a guess!)  Impact on inventory accounting

Rebates, discounts and incentives

Common practice in many industries especially retail, FMCG, Software, IT equipment and where re-sellers / distributors are used instead of selling direct to end user. Common bases for rebates / discounts are:
   

prompt payment discounts (e.g. 2%/10 net 30) volume % rebate changes as agreed volume is reached. price protection company increases its list price but protects key customers (less publicly) by giving the increase back as a rebate or credit note. back to back promotion - company reimburses customer for promotion spend / putting product in premium location / pushing product with end user customers. Common in retail, FMCG and IT reseller environments

Consignment sales

Arrangement with a customer whereby title does not pass from the company to the customer until the customer utilizes the product in its operations.

The existence of consignment agreements is a complex revenue recognition area. If you become aware of this type of arrangement, consult with more senior members of engagement team. Make sure you understand the companys revenue recognition policy and how it accounts for deferred revenue.

Deferred revenue

Revenue received, but not earned until all criteria for revenue recognition are met. It is recorded as a liability on the balance sheet.

Assertion Valuation Have revenue and receivables been stated at net collectible amounts? Have allowances for doubtful debts, discounts, rebates, returns and similar items been made? Are the allowances adequate but not excessive?

What are the common risks? Non payment risk Can arise from disputes, customer financial difficulties, fraud, revenue recognition issues (service not yet delivered) and accounting errors. Heightened risk in situations where there are high volumes of small one-off transactions, as collection costs can be very high. If accounting records / audit trail is poor the risk is higher as providing documentary proof of debt for collection enforcement is difficult.

Fraud Risk Inflated receivable balances, suppression of disputed balances, sales which will be reversed out and goods returned after the audit is over. Credit notes issued after year end. Accelerated revenue recognition. Look at trend analysis, subsequent notes after year end. (see PwC Audit 4260 - Appx 5) Inadequate reserves or failure to adequately recognised bad debts or impairment of receivables (see PwC Audit 4260 - Appx 5) Sham transactions e.g. recording refundable deposits as income. (see PwC Audit 4260 - Appx 5) Long term rebates taken too soon, rebate liabilities suppressed, valueless rebate assets carried forward. Misuse of derivatives, taking losses direct to reserves Sales being suppressed in current year to manipulate bonus schemes.

What shall I do about it? Good quality evidence includes after date cash, written evidence of debt acceptance or evidence of disputes (debt confirmation and the company correspondence). Watch out for inflated debtors figures, suppression of disputes / bad debts (e.g. not disclosing damaging correspondence, falsifying debt confirmations). If the credit controller says the amount owed by the debtor is just gut feel then you can still ask for the documents the debtor will request when payment is demanded - e.g. sales order reference and signed proof of delivery (POD) / despatch documents. If not sufficient consider credit check information such as published financial statements and D&B reports. Common procedures include debt confirmation / checking the age analysis by tracing documentation (invoices etc)/ confirm arithmetic accuracy (link to controls work). Assess the adequacy of the allowance for doubtful accounts through substantive analytical procedures or test of details. Discuss collectibility with management and review, as deemed appropriate, other documentation supporting collectibility. Review controls over revenue and receivables. Verify authorisation of rebates, or check to the underlying contract. Review rebates, credit notes, discounts given post year end.

Rebates Common practice in many industries especially retail, FMCG, Software and where re-sellers / distributors are used instead of selling direct to end user. Common bases for rebates / discounts are:  prompt payment  volume (% rebate moves as agreed volume is reached)  Price protection (company raises its list price but protects key customers (less publicly) by giving the increase back as a credit note)  back to back promotion (company reimburses customer for promotion spend / putting product in premium location / pushing product with end user customers) Foreign exchange Sales may have been translated from a foreign currency - the risk is the exchange rate used and the treatment of the profit or loss on exchange.

Early delivery of product prior to customer readiness. Back ordered sales - recognising revenue to back ordered goods that are not shipped yet. (see PwC Audit 4260 - Appx 5) Compare exchange rates used by client to PwC database or similar. Ensure treatment of any profit or loss is in accordance with IAS21.

Assertion Presentation and Disclosure Are revenues and receivables disclosed correctly? Are the figures recorded in the financial statements in agreement with the accounting records?

What are the common risks? Factorisation/ security If the debt has been sold / factored / used as a security for a loan this creates RISK. Has the client treated the cash received from the finance company as settlement of the trade debt? For most of these schemes the risk of non-payment stays with the company (recourse) - so if the customer does not pay then the finance company will want their money back (or have our client pay the interest costs of delayed payment) - and should be treated as borrowing. Intercompany Be aware of trading between group companies. Is this disclosed as intercompany or included in Trade Receivables?

Fraud Risk Hidden borrowing factoring / securitising debts and not disclosing the arrangements, or abusing a disclosed securitisation scheme?

What shall I do about it? Consult with Team Manager / EL Watch out for:  treating borrowing as a payment of a trade debt and hence understating debtors / borrowings.
 defrauding the finance company (e.g. issuing fake invoices to get funds advanced under false pretences or not passing payments from customers on to the finance company).

Undisclosed trading with related parties, overstatement of consolidated third party debts. (see PwC Audit 4260 - Appx 5)

Are these consolidated accounts where intercompany profit and balances need to be eliminated? Look at monthly reconciliations for reconciling items being followed up and cleared. (IAS 24 par 4) Also watch out for: Disclosure of any security given, long term receivables, and credit balances incorrectly deducted from trade debtors.

Classification Should revenue be presented gross or net? Is the revenue earned from the sale of goods or services? Does the revenue represent a commission or fee from a supplier or provider? Should rebates or sales incentives be classified as a reduction of revenue or as an expense? Cut off Transactions relating to trade debtors, sales, credit notes, etc. have been recorded in the correct accounting period. Rebates Timing - rebate may occur over two / three year period but all taken in one year / not accrued in early years. Items in transit They may be treated as a sale when in fact they have not been dispatched and vice versa. Bringing sales into this year to boost profits/ turnover.

This is a complex area, consult with more senior members of engagement team for further guidance.

Review terms of rebate and discuss with EL / Team Manager. Review despatch documentation, analyse level of activity immediately prior and post balance sheet date.

Assertion Completeness Have all transactions been recorded in the profit and loss and all balances in the balance sheet?

What are the common risks? Incomplete revenue Goods / services delivered within the accounting period have not resulted in an appropriate accounting entry being initiated - more common in environments where systems for revenue / purchases / inventory are not effectively integrated (see sales cut off). Rebates Completeness marketing / commercial teams have given customer incentives which the finance team do not know about how does the client identify, control and quantify all incentives and special deals? Receivables ledger reconciliation With integrated systems the total debt detailed in the Accounts Receivable account listing will usually agree to the Accounts Receivable balance in the General Ledger. If not: Ask why not? - usually due to underlying IT systems not being integrated ask what else this characteristic could impact - sales cut-off, inventory records?

Fraud Risk Sales being diverted to individual / related party.

What shall I do about it? Look carefully at Confirmation replies, receivables ledger reconciliation and the underlying accounting system - how does the client know the balance is complete? Discuss current rebate schemes with marketing department - ask for a list of all schemes and clarify how they communicate them to the finance team. Look for - long, complicated reconciliations with multiple components where the client struggles to agree balances. Start at the big picture - can the client staff articulate clearly what each element of reconciliation is, why it is there and how it clears? Does the overall result of the reconciliation mean there is bigger asset reported in the accounts than in the ledger? Does the client use vague descriptions like timing differences to explain reconciliation? Do items on the reconciliation clear regularly? Move onto detailed validation after consulting with Team Manager / EL. Send out debtors confirmations / signed POD (who signed it?) / cash receipts / correspondence / (link to controls work). Review after date credit notes/returns documentation, ascertaining whether sales recorded prior to the year end were genuine sales. Test recorded sales invoices back to signed despatch documentation. Select reconciliations for detailed validation after consulting with more senior members of engagement team. Review bad debt write-offs assess reasonableness of bad debt expense compared with prior years, examine documentation of writeoffs, determine whether write-offs are appropriately authorised and examine documentation of original sale.

eAccidental accounting muddles may mean you miss items. If trying to obscure the true position then commonly the result of the mess is that the asset in the accounts is much larger then the specific debts you know you can link to individual customers.

Existence/ Occurrence Has the transaction actually taken place and does the debtor exist at the balance sheet date?

Non payment risk Can arise from disputes, customer financial difficulties, fraud, revenue recognition issues (service not yet delivered) and accounting errors.

Debtors may be inflated for example fake invoices, falsifying debt confirmations, journals, delaying credit notes provisions and rebates. False sales to existing customers or sales to customers that do not exist (see PwC Audit 4260 - Appx 5) Large unusual sales transactions particularly near period end.

Assertion Rights & Obligations Recorded trade debtors represent amounts owed to the company at the balance sheet date, and the company is subject to substantially all the risks and is entitled to substantially all the rewards therefrom.

What are the common risks? Distributors/ Resellers Where company sells via distributors / resellers, the risks are: Solvency of the wholesaler - they may get financial indigestion if they overtrade.
Channel stuffing - pushing product onto resellers (who may

Fraud Risk Channel stuffing shipping of products to customers who are encouraged to overbuy under short term offer of deep discounts (see PwC Audit 4260 - Appx 5) Bill and hold - sales agreed but goods not shipped to customer (see PwC Audit 4260 - Appx 5) There are also many other schemes on variations of the schemes above keep your eyes open! Numerous side letters with customers outside of the course of normal reporting channels (see PwC Audit 4260 - Appx 5)

What shall I do about it? What are terms of trade - especially over returns, price guarantees, warranty arrangements, product upgrades or changes. Review level of product sent to wholesaler and level of returns from them. Review amount and age of debt owed from the wholesaler.

struggle to say no if they rely on our client) so it is a sale although reseller cannot afford to settle the debt for months - or even sends goods back. Also watch out here for debt factoring / securitisation and hidden borrowing.

Confirm if any debt factoring / securitisation / discounting schemes exist - if so review documentation carefully - contact Team Manager / EL. This must not be recognised as revenue as the customer may ask for the money back. It must be held as a liability until a time in the future when it would be reasonable to assume the customer will not require a refund. Ask your EL / Team Manager. Inquire management, accounting personnel and sales force whether the entity often/ever makes side agreements. Ensure that a sales invoice was issued and the sale was accurately posted to the correct customer's account in the sales ledger; Test the pricing by checking invoice to an authorised price list / catalog or special terms such as discounts, agreements and authorization by responsible official; Test the mathematical accuracy of sales returns credit invoices and the prices by checking credit invoice to sales invoice; and Test that the quantity of sales returns is in accordance with credit invoice. Determine that the discounts have been authorised by an appropriate person. Consider examining credits for discounts and allowances issued after year end for applicability to the preceding year. Analysing sales discounts and returns for unusual patterns or trends

Overpayments by the customer

Existence of side letters

Accuracy Have amounts and other data relating to recorded transactions and events been recorded accurately ?

Inaccurate underlying documentation/data Inaccurate underlying data - e.g. invoice details (price, goods supplied, quantity, date etc) credit notes, cash receipt records, foreign exchange rates used for recording the transactions not accurate. Sales Discounts Sales discounts may be given in excess of the authorised amount to achieve determined sales objective.

Large, numerous or unusual sales transactions occurring shortly before the end of the period. See PwC Audit 4260 Appendix 5

Examples of analytical procedures

Below are examples of types of analytical procedures that could be considered when developing testing strategies. This is not a complete list. Additional considerations should include: industry specific analytics, the rigor of the analytical procedure for the level of assurance desired, and also the relevant assertion for the test objective. These should be discussed with your Team Manager in advance of any testing. Accounts receivable Receivables as a percentage of sales Number of days sales in receivables Accounts receivable turnover Aging of receivables by category and as a percentage of accounts receivable Write-offs as a percentage of sales by location Provision for doubtful debts as a percentage of sales Provision for doubtful debts as a percentage of receivables Sales Revenues by location, and/or units sold, product, period (weekly, monthly, quarterly) and company Average daily sales by product, and/or location, and/or company, prior to and subsequent to period end Average daily credits prior to and subsequent to period end Average sales growth for the year compared to industry growth rates Average sales per customer compared to prior years Gross margins by product and/or location and/or period (weekly, monthly, quarterly) Returns, discounts and allowances as a percentage of revenues Returns, discounts and allowances as a percentage of accounts receivable Returns, discounts and allowances daily for month prior to and subsequent to period end Returns, discounts and allowances by location, and/or company, and/or product

Other things to look out for..



Significant changes in aging profile - Understand reasons - not just management performance but can indicate changes in external economic environment, customer problems and disputes, changes in terms of trade (rebates, discounts, etc.), systems problems and changes in other areas of business. Sundry debt or cash sales in accounts receivable - Usually set up as an account to deal with one-off sales to small customers - balance should be limited to the time taken for credit card companies to settle authorised transactions. Credit balances - If frequent why are they happening? Is there evidence of missing transactions, fraud or system problems? Unusual account numbers / names such as 99999 accounts or specials - especially if staff refer you to another (senior) team member - Bill always deals with those - youll have to talk to him. Also be aware of suspense / holding accounts should be reconciled to zero at the year end. If there are items in them, they should be new items and fully backed by evidence. Be aware of sales returns post year end - are they valid or are they and attempt to boost year end sales?

    

Audit Survival Kits

Purchases and Payables

4. Purchases and Payables - What you should understand before you start work..
Purchase of a specific material or service?

How are these costs or purchases measured?

Acquiring of a facility? By units? Quantity / weight / volume Level of inherent risk? e.g.: High/low volume of transactions, nature of suppliers (blue-chip or high risk?), domestic or import (currency risk / forward contracts?), Purchased on line / telephone or paper based ordering

What are the characteristics of the purchase?

Do the transactions have complex structures? e.g.: Rebate schemes, lease finance, contract accounting, multi-part acquisitions, deferred payment arrangements, subscriptions, sale and leaseback?

What does the company buy and why does the company need it?
Do you understand how these purchase / costs have made their way into the ledger?

Do you understand how:  The purchase order was input into the system?  Price, quantity and availability of goods/service resources was agreed and checked?  Key files were accessed/updated e.g.: inventory, supplier/vendor standing data, price?  Accounting entries were initiated and processed?  The transaction was authorised/reviewed? Typically payments are authorised at the end of the cycle as the payment is being made, but some systems rely on authorisation of the purchase order and subsequent matching to goods received and invoices. If this is OK then payment is automatic. - you need to know which approach is being used.  How general ledger accounts are protected from unauthorised adjustment? Level of control risk? e.g.: consider prior year deficiencies, understand companys systems and key controls? Suppliers history and CAKE?

Where is risk concentrated?

e.g.: High volume of credit notes and disputes, poor accounting?

Is risk concentrated into a few large balances or high volume of small ones?

Document/Term Purchase requisition

Explanation May be formal or informal, the start of the process - if someone wants to buy anything from stationery to raw materials, they have to ask someone (e.g. purchasing department) - this is the purchase requisition. This is a formal includes details documents can officials. There request to a supplier to deliver goods or provide a service. Usually of goods, services required, prices, delivery date, etc. - these bind the company and should therefore only be issued by responsible may be a hierarchy of authorisation levels.

Hints and Tips Not part of the accounting process - no accounting entries are booked but lack of a formal process could indicate lax procedures further down the line. The client can not claim to be in control of its finances / cashflow if it does not control its orders.

Purchase order

Goods received note

These are used to record the receipt of goods and should ideally be sequentially numbered so that they can all be accounted for. They should be agreed to the order to ensure the correct goods have been delivered and subsequently to the invoice (price and quantity). They should initiate the first accounting entry Dr Inventory Cr Accruals (or Dr P & L Cr Accruals for expense items). Confirmation of goods/service delivered and bill for payment. Usually includes date, purchase order number, price, description and quantity of goods/service, delivery address and date, VAT details, total owed and customer reference/contact details. Document reducing the amount owed by purchaser - should be authorised by someone in a supervisory capacity. Usually caused by disputes or errors on the original invoice (e.g. wrong price). If arising in large quantities can indicate problem with underlying system or quality of goods. Company would issue these in relation to their sales/ receivables. Purchasing company receives these from their supplier. If purchaser is disputing an invoice and considers the seller has been slow in issuing a credit note some will send in a debit note which is a demand from the purchaser to the seller for a reduction and acts as a prompt (and to manage the purchasers internal book keeping).

Some clients rely on suppliers delivery documentation but this is not sequentially numbered and systems can get messy. You may have to go to the warehouse to see the original records.

Invoice

Just because it is invoiced doesnt always mean it is an expense or an asset, was delivered or will be paid. Is someone ordering goods for personal use? Credit notes matter - they represent an asset to the purchasing company. It may be an indicator of quality problems with goods or services received.

Credit note

Debit note

Many clients do not enter them in their books so ask how they deal with them. Again, these are assets and must be validated. Are we happy that the purchaser has proper records of goods returned, damaged, etc., or are they trying it on. Regular debit note cancellations may mean that debit notes are not real assets. In aged purchase ledger analyses many clients show payments on account separately. Some may even reclassify as a debtor.

Payments on account

Payment to a supplier. Most of the time each payment can be broken down by specific invoice and this is shown in detail on a Remittance Advice issued with the payment. On some occasions the purchaser may pay a lump sum not linked to invoices - a payment on account. It can be an agreed practice but it can also indicate an accounting muddle, financial difficulties or a dispute. Payment may be made by cheque or automated funds transfer. These will normally include: Opening (less closing) inventories; direct materials; other external charges, such as hire of plant & machinery or cost of casual labour used in the production process; direct labour; all production overheads including depreciation and indirect overheads that can be reasonably allocated to the production process; product development expenditure; cash discounts received on cost of sales and inventory provisions.

Cost of sales

We should consider the appropriateness of the classification of balances included in cost of sales. The percentage of cost of sales to sales is typically a key performance indicator used by companies.

Document/Term Adjusting journals entries

Explanation Any other adjustment to the ledger. Common reasons include rebate schemes, forex differences on settlement and prompt payment discounts. Adjustments which are one-offs should be rare and should be authorised by senior personnel. Common practice in many industries. Common bases for rebates/discounts are:  prompt payment  volume % rebate changes as agreed volume is reached  price protection - supplier/vendor increases its price (i.e your client) but protects key customers (less publicly) by giving the increase back as a rebate or credit note.

Hints and Tips These occur at the individual account balance level and as part of the ledger reconciliation.

Rebates, discounts and incentives

Rebates can pop up as assets or liabilities depending on the scheme. Make sure you understand at the start:  The timing of the scheme  How debtors will be recovered/ liabilities paid.  How the client tracks the balance transaction by transaction client may lose track of individual and specific components of rebate balance and end up with estimate (or just a guess!)  Impact on inventory accounting Testing the cut off of the reconciling items is vital - The reconciliation may include debit notes - see above, we need to ensure that they are recoverable. Suppliers may draw their statement up to a date other than the period end. Therefore do not expect perfect accuracy as in a bank reconciliation but do not ignore odd differences. If the client is counting inventory before the year end and rolling forward then the accuracy of accruals at this inventory count date may be important therefore more benefits may be gained from suppliers statement reconciliations at the inventory count date rather than the year end.

Suppliers statement reconciliation

Suppliers often send statements to their customers listing the amounts (invoices) not yet paid. Reconciling the balance on the statements to the balance on the purchase ledger can provide good evidence of the accuracy of the purchase ledger and valuation and existence of the accounts payable. These reconciliations should be performed by the client not us. THEY ARE NOT A MATHEMATICAL EXERCISE - we need to understand the reconciling items and whether they have been treated correctly. Common reconciling items include:Invoices on statement not on ledger - when were the goods/services delivered - e.g. before the period end there must be an accrual (this is one of the easiest ways of identifying omitted liabilities). Cash in transit - did we send a payment close to the period end that was not received by the supplier until after - check details in cash book records (NB some suppliers keep their books open after the period end and can record payments that purchaser did not pay until after the period end).

Distribution costs

These will normally include: payroll cost of sales, marketing and distribution functions; advertising; salespersons travel and entertaining; warehouse costs for finished goods; transport costs concerning the distribution of finished goods; all costs maintaining sales outlets and agents commission payable These will normally include: costs of general management; all costs of maintaining the administration buildings; bad debts; professional costs; cash discounts on sales; research and development expenditure that is not allocated to cost of sales.

Distribution costs are generally interpreted more widely then the name suggests and often include selling and marketing costs.

Administrative expenses

ISA 330 par 49 require the performance of some substantive procedures (either substantive analytical procedures or tests of details, or both) on material classes of transactions, balances and disclosures. Test classification of material balances included in administrative expenses. This does not include provisions for future operating losses. IAS37 states that they do not specifically meet the definition of a liability so, a provision should not be recognised.

Provision

A provision is simply defined by IAS37 as a liability of uncertain timing or amount. If the company has a present obligation (whether legal or constructive) as a result of a past event and it is probable that a transfer of economic benefits will be required to settle the obligation a reliable estimate can be made for the amount of the obligation. Accruals are the estimate of expenditure still outstanding at the balance sheet date. For example if the gas bill is still outstanding at the year end, the company will need to make an estimate as to how much they owe the gas company. The double entry will be Dr gas expense (P&L) Cr Accruals.

Accrual

Need to make sure that the calculation to estimate the accrual is reasonable and in line with expectations. Gut feel is not enough.

Assertion Valuation Have purchases and payables been stated at net payable amounts? Have allowances for discounts receivable, rebates, returns and similar items been made? Are the allowances adequate but not excessive?

What are the common risks? The most important risks for valuation are as follows, but you must also consider these risks for completeness as well: Are we confident the companys systems (IT and/or manual) have captured all the goods or services that they have acquired in a period? How up to date is the processing of purchase invoices? How good are the goods received systems at recording? Does the system match processed invoices against goods received and purchase orders (3way matching)? Can the system produce exception reports for unmatched items? Does the company do a review for completeness by reviewing margins or costs against budget to check for any missing items?

Fraud Risk Intentional manipulation of supplier accounts to understate liabilities, e.g. not posting of invoices, undervaluing invoices, claiming non existent rebates, suppressing record of goods delivered, setting up false suppliers, and claiming to have lost supplier statements.

What shall I do about it? Good quality evidence includes supplier statement reconciliations performed regularly on key accounts. Reconciling items should have explanations for why they are not included on the ledger e.g. included in accruals or received after cut-off date. Regular review and clearance of exception reports e.g. goods received not yet invoiced and unmatched purchase orders are good evidence for the control over completeness of the processing. Always make sure you are looking at original documentation and not photocopies or faxed versions. If in doubt speak to the supplier directly and request a copy sent direct to you. Circularise the suppliers if necessary. Check lists of unmatched documents such as invoices, purchase orders and goods received notes to establish if these represent unrecorded liabilities. Verify authorisation of rebates, or check to the underlying contract. Review rebates, credit notes, discounts received post year end. Be aware of cut-off at the year end. If the client receives or applies rebates, such as volume based an assessment needs to be performed of the year end position and expected outcome - accruals. Compare exchange rates used by the client to PwC database or similar. Ensure treatment of any profit or loss is in accordance with IAS21. Does the client have a process for updating foreign exchange rates each month in the A/R and A/P ledgers?

Rebates See prior section (term/ document) for definition.

Foreign exchange Purchase may have been translated from a foreign currency - the risk is the exchange rate used and the treatment of the profit or loss on exchange. Liability may be settled in a foreign currency - do we understand the risk involved? Has the client purchased foreign exchange / forward contracts? Accruals Have the accruals been calculated correctly? Watch out for over accruals that could be reversed in the following year.

Obtain the clients calculations on the accruals. Obtain supporting documentation, such as contracts, invoices which detail stage payments, for utilities look at prior year or equivalent period and discuss any changes. Fictitious inventory: Unusual or suspicious purchase orders. See PwC Audit 4260 Appendix 5 Review of controls around purchases. Verify the purchase prices used in purchase orders, and purchase invoices, to approved price lists or other available evidence.

Accuracy Have amounts and other data relating to recorded transactions and events been recorded accurately ?

Inaccurate underlying documentation/data Inaccurate underlying data - e.g. invoice details (price, goods supplied, quantity, date etc) credit notes, foreign exchange rates used for recording the transactions not accurate. Incorrect quantities received The quantity received in the warehouse may not be correct. If not detected, the records in the system may be wrong which may impact production.

Assertion Cut off Transactions relating to trade payables, purchases, credit notes, etc. have been recorded in the correct accounting period.

What are the common risks? Rebates Timing - rebate may occur over two / three year period but all taken in one year / not accrued in early years. Items in transit They may be treated as a purchase when in fact they have not been received and vice versa.

Fraud Risk Bringing purchase into later year to boost profits/ this year.

What shall I do about it? Review terms of rebate and discuss with EL / Team Manager.

Review GRNI documentation, analyse level of activity immediately prior and post balance sheet date.

Completeness Have all transactions been recorded in the profit and loss and all balances in the balance sheet?

Incomplete costs Goods/services received within the accounting period have not resulted in an appropriate accounting entry being initiated - more common in environments where systems for purchases/ inventory are not effectively integrated (see purchase cut off). Rebates Completeness - purchasing teams have negotiated incentives which the finance team do not know about - how does the company identify, control and quantify all incentives and special deals receivable? Unrecorded liabilities Can arise from disputes, supplier financial difficulties, fraud, cut-off issues (goods or service not yet received) and accounting errors.

Purchase being diverted to individual / related party. Costs being suppressed in current year to manipulate bonus schemes. Liabilities may be understated - for example missing invoices, falsifying supplier statements, journals, overstating credit notes and rebates.

Look carefully at supplier statements or circularisation replies, Purchase ledger reconciliation and the underlying accounting system - how does the client know the balance is complete?

eAccidental accounting muddles may mean you miss items.

Discuss current rebate schemes with purchasing department - ask for a list of all schemes and clarify how they communicate them to the finance team.

Testing supplier statement reconciliations / send out supplier confirmations / signed POD (who signed it?) / correspondence / (link to controls work) Perform unrecorded liabilities testing including review of cash payments and invoices subsequent to year end Look for - long, complicated reconciliations with multiple components where the client struggles to agree balances. Start at the big picture - can the client staff articulate clearly what each element of reconciliation is, why it is there and how it clears? Does the overall result of the reconciliation mean there is a smaller liability reported in the accounts than in the ledger? Does the cleint use vague descriptions like timing differences to explain reconciliation? Do items on the reconciliation clear regularly? Move onto detailed validation after consulting with Team Manager / EL. Common procedures include supplier statement reconciliations / confirm arithmetic accuracy (link to controls work).

Purchase ledger reconciliation With integrated systems the total liability detailed in the Purchase Ledger listing will usually agree to the Accounts Payable balance in the General Ledger. If not: Ask why not? - usually due to underlying IT systems not being integrated ask what else this characteristic could impact - purchase cut-off, inventory records?

Assertion Rights & Obligations Recorded trade payables represent amounts owed by the company at the balance sheet date.

What are the common risks? Goods in transit Understand the groups rules - if inventory leaves the overseas factory bound for our client, which company should recognise that asset. Always ensure that the inventory is actually received after the period end.

Fraud Risk

What shall I do about it? What are terms of trade - especially over returns, price guarantees, warranty arrangements, or liens whilst the item is unpaid?

Presentation & Disclosure Are purchases and payables disclosed correctly?

Intercompany Be aware of trading between group companies. Is this disclosed as intercompany or included in Trade Payables? Payments on Account How are payments on account treated - for example debit balances on the purchase ledger. Liability shown properly Is the liability disclosed appropriately? Is there any security or rights of lien over any assets purchased that need to be disclosed? Payment due Are the payables due within one year or over one year?

Are these consolidated accounts where intercompany profit and balances need to be eliminated? Look at monthly reconciliations for reconciling items being followed up and cleared. Consider the recoverability of any payments on account or debit balances on the purchase ledger. Dont just assume its a simple reclassification matter. How did the debit balance occur in the first place - could it be the client has had to make a payment but hasnt yet processed the invoice? Do debit balances represent overpayments i.e. a weakness in the system? Payables need to be disclosed in the balance sheet as due within one year and due after one year.

Existence/Occurrence Has the transaction actually taken place and does the payable exist at the balance sheet date?

Do recorded purchase transactions represent goods and services actually received during the period covered by the financial statements? Do recorded payroll transactions represent wages for services actually performed during the period covered by the financial statements?

Consider selecting vendor accounts payable balances and performing the following: For vendor invoices subsequently paid, trace recorded liabilities on the detailed listing to the disbursements records and check advices for that vendor and verify that the payments relate to the detail account balance by agreeing invoice numbers and amounts. For vendor invoices not subsequently paid, trace selected recorded liabilities on the detailed listing to supporting documentation (e.g. invoices, receiving reports, etc.) These procedures are often combined with the search for unrecorded liabilities. Consult with more senior members of engagement team before performing additional procedures in this area.

Examples of analytical procedures

Below are examples of types of analytical procedures that could be considered when developing testing strategies. This is not a complete list. Additional considerations should include: industry specific analytics, the rigor of the analytical procedure for the level of assurance desired, and also the relevant assertion for the test objective. These should be discussed with your Team Manager in advance of any testing. Accounts Payable Accounts payable by supplier, and/or type of purchase, and/or purchasing division or cost center Accounts payable as a percentage of purchases and as a percentage of sales Rebates daily for the month prior to and subsequent to period end Credits and allowances from suppliers as a percentage of purchases Operating Expenses Purchases or goods by product and/or location as a percentage of cost of sales Purchases or services by service type or location (geographical or business units) Other expense account balances as compared to previous years or total expenditure or other expense accounts Accruals/provisions and other liabilities Individual accrued expenses as compared to previous years or other related accounts Warranty expense as a percentage of sales and as a ration to the warranty accrual Individual liabilities as compared to previous years or other related accounts

Other things to look out for..

          

Sundry debt or cash purchase in accounts payable usually set up as an account to deal with one off purchase to small customers - balance should be limited to the time taken for credit card companies to settle authorised transactions. Purchasing cards / fuel cards / expense claims - areas open to abuse unless properly monitored and controlled - what is the volume of uncleared / unprocessed items (whether paid or unpaid) and have they been charged to the P&L? Unusual account numbers / names such as 99999 accounts or specials - especially if staff refer you to another (senior) team member - Bill always deals with those - youll have to talk to him. Who can open a new purchase ledger account? This could be like giving a fraudster a cheque book. Too many accounts on the purchase ledger not used could be an opportunity for fraud. Dont forget interest accruals. Accruals by their nature may involve estimates - are they reasonable, does the balance of prudence change from year to year? Accruals will vary year on year - analytical review alone is not likely to be good audit evidence. VAT - do we really know how the balances arise or are we just agreeing to a return? PAYE/NI - agree to payroll, has the previous month been paid before the year end? Your client needs to think about managing his creditor days. To calculate creditor days is [(trade creditors/ total purchases) * 365]. This needs to be compared to the length of time it takes to collect cash into the business. Ideally the cash in needs to come in before the cash out. Payment timing versus P&L recognition i.e. Rates - make payments over 10 months but recognise in P&L over 12 months - do they gross this up Dr Prepayment / Cr Rates creditor? The company needs to think about managing its payable days outstanding. This needs to be compared to the length of time it takes to collect cash into the business. Ideally the cash needs to come in before the cash goes out. Payment timing versus income statement recognition.