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Chapter 16
Case Study
What auditing procedures might allow Blanket, Mange to discover the
existence of the action?
How might the amount of the ultimate award and costs be
determined by Blanket Mange?
What other hidden liabilities might Tickitt & Run have at their year
end?
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Examination questions
1. Liabilities
Audit of payables, accruals and provisions
(a) Company A
(i) 10-year bank loan and bank overdraft
1. Authorisation for the loan and overdraft should be checked to the minutes
of a board or other relevant meeting.
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(ii) Expense accruals
1. If accruals are material to the financial statements, more evidence will be
required than if they are not. If accruals are not material, analytical
procedures may be sufficient audit evidence.
(iii) Trade payables and purchase accruals
1. The nature and extent of testing will depend on the quality of controls over
trade payables, as evidenced by interim testing of internal controls. Evidence
in relation to the completeness of trade payables and accruals is important,
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(b) Company B
(i) Provisions for manufacturing warranty claims are heavily dependent on
the judgement of directors. The auditors should establish how the directors
have arrived at the provision and assess it for reasonableness in the light of
previous provisions and claims. More work will be required if there has been
a significant discrepancy between provisions and claims in the past and more
work will be required if the company does not have significant experience in
dealing with this type of warranty claim.
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2. Curdco
(a) Headings: accounts payable and accrued expenditure. Whilst there are a
great number of possible headings for accounts payable and accrued
expenditure, the seven headings below seem likely:
(b) Audit tests and reasons: accounts payable and accrued expenditure
General
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Food, payroll, cleaning, maintenance of properties
(iv) In all cases, substantive procedures would involve tracing source
documentation created by the company (such as purchase orders for food,
contracts with the cleaning and maintenance agencies and clock cards or
timesheets) through the system (via goods received notes, signed
documentation indicating that services had been performed, etc.) to
daybooks, ledgers and control accounts and finally to schedules supporting
the financial statements. This type of test helps provide audit comfort that
accounts payable and accruals are complete, correctly calculated, properly
authorised and recorded in the correct accounting period. NTAC
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(ix) For many such items, there may be accrued expenditure. Tests for
accrued expenditure will be similar to those noted under the following
heading.
Waste disposal, light, heat, water and other utilities and business and other
local taxes
(x) These items are less likely to have source documentation created by the
company than those noted above. They are also more likely to be billed or
invoiced less frequently than those noted above and there are likely to be
more accruals for such items.
(c) Difficulties and decisions: direct confirmation of accounts payable
(i) Many of the difficulties faced by auditors conducting direct confirmations
of accounts payable are the same as those relating to direct confirmations of
accounts receivable. Clients are sometimes resistant to conducting such
confirmations.
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