Trade Payables

​

Trade Payables Audit Case Example: ABC Manufacturing Company

Context

For ABC Manufacturing Company, trade payables are an essential component of working capital management and reflect the company’s short-term liabilities to its suppliers for goods and services received. Accurate accounting and disclosure of trade payables are crucial for presenting the company’s financial position accurately.

Audit Objective

To obtain reasonable assurance that trade payables recorded in ABC Manufacturing Company’s financial statements are complete, accurate, valid, appropriately classified, and disclosed in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Trade Payables Assertions

1. Completeness

• Case: Verify that all obligations to suppliers for goods and services received are included in trade payables.

• Documentation: Document reconciliation procedures between trade payable balances and supplier statements, purchase orders, and receiving reports to ensure completeness of recorded payables.

2. Accuracy

• Case: Assess the accuracy of the amounts recorded as trade payables, including correct invoicing and application of terms.

• Documentation: Document specific testing procedures and recalculations performed to verify the accuracy of amounts recorded as trade payables, including examination of invoices, contracts, and payment terms.

3. Existence

• Case: Confirm that the recorded trade payables represent genuine obligations of the company.

• Documentation: Summarize the inspection of supporting documentation and confirmations from suppliers to substantiate the existence of the recorded obligations.

4. Obligations (Rights and Obligations)

• Case: Ensure that the company has a legal or constructive obligation to settle the recorded amounts.

• Documentation: Document the review of contracts, purchase agreements, and terms and conditions with suppliers that establish the company’s obligations to pay the recorded amounts.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that trade payables are correctly classified (e.g., as current liabilities) and adequately disclosed, including terms, conditions, and any supplier financing arrangements.

• Documentation: Evaluate the presentation and disclosure of trade payables, verifying that disclosures comply with financial reporting standards and provide clear information on the nature and terms of the liabilities.

Additional Considerations

• Aging Analysis: Perform and document an aging analysis of trade payables to identify overdue amounts and assess the adequacy of disclosures regarding payment practices and liquidity risk.

• Internal Controls Evaluation: Evaluate the design and effectiveness of internal controls over the recording and payment of trade payables, including authorization of purchases, receipt of goods and services, and processing of payments.

• Related Party Transactions: Identify and document any payables to related parties, assessing the appropriateness of the terms and disclosure of such transactions in accordance with applicable standards.

• Inquiries of Management: Conduct inquiries with management regarding policies for recognizing and managing trade payables, disputes with suppliers, and potential unrecorded liabilities.

• Communication with Those Charged with Governance: Discuss significant findings or issues identified during the audit of trade payables with management and those charged with governance, especially concerning the completeness, accuracy, and disclosure of liabilities.

Conclusion

The audit of trade payables is vital for ensuring that these liabilities are accurately recognized, measured, and disclosed in the financial statements. Documenting the audit procedures and findings related to each relevant assertion provides a foundation for the auditor’s opinion on the financial statements, enhancing the credibility and transparency of the financial reporting related to trade payables.