Purchases, payables, and accruals - Supplier statement recon...

Learning Outcomes

After reading this article, you will be able to explain the purpose of supplier statement reconciliations in the audit of purchases, payables, and accruals. You will understand how to perform reconciliations, identify common reconciling items, and describe substantive procedures for payables and accruals. You will also assess the reliability of supplier statements as audit evidence and explain typical errors and audit responses.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand supplier statement reconciliations as they relate to audit objectives and evidence for payables and accruals. Particular focus is required in the areas below:

• The audit objectives for payables and accruals, and the relevance of completeness and accuracy assertions.
• The use and evaluation of supplier statement reconciliations as substantive audit evidence for payables.
• The audit procedures to obtain sufficient and appropriate evidence over payables and accruals, including addressing reconciling differences.
• Identification of common errors in supplier statement reconciliations and audit responses.
• The distinction between supplier confirmations and supplier statements as evidence.
• Communicating deficiencies in internal controls over payables and accruals to management.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main audit assertion addressed by reconciling supplier statements to payables ledgers?
2. List two common reconciling items between a supplier statement and an individual supplier account.
3. True or False? A supplier statement is always more reliable evidence than external confirmation from a supplier.
4. Describe one audit procedure for investigating an unmatched invoice found on a supplier statement but not in the purchase ledger.

Introduction

Payables and accruals often represent significant liabilities in the financial statements. Ensuring their completeness and accuracy is a key audit objective. Supplier statement reconciliations are an important audit procedure, providing direct evidence on payables balances by comparing the client’s records with third-party statements.

Key Term: Supplier Statement Reconciliation
The process of agreeing a supplier’s statement (provided by the supplier) to the client’s individual supplier account to verify completeness and accuracy of recorded payables.

The Purpose and Scope of Supplier Statement Reconciliations

Supplier statement reconciliations help confirm that all liabilities to suppliers are captured and correctly recorded. They alert the auditor to goods or invoices received but not yet processed by the client, payments in transit, disputed items, or errors.

Reconciliations often identify understatements or overstatements that might otherwise be missed. Auditors perform these reconciliations as a substantive procedure, particularly where payables balances are material or controls over purchases are weak.

Key Term: Reconciling Item
A difference identified when comparing the supplier statement with the client’s supplier account—such as timing differences, unrecorded invoices, or payments in transit.

Steps in Performing Supplier Statement Reconciliations

1. Obtain supplier statements: Collect statements from major or selected suppliers as at the reporting date.
2. Agree balances: Compare the closing balance on the supplier statement with the closing balance on the client’s purchase ledger for the same supplier.
3. List differences: Identify any unmatched items appearing on the statement but not the ledger (and vice versa).
4. Investigate variances: For each reconciling difference, determine the reason and whether an adjustment, accrual, or reclassification is needed.
5. Conclude: Assess whether payables are fairly stated or require adjustment based on reconciliation findings.

Common Reconciling Items

Typical reconciling items in supplier statement reconciliations include:

• Invoices received by supplier but not yet by client: These should be accrued in the client’s records if goods/services have been received before year-end.
• Payments sent by client but not yet received by supplier (payments in transit): These reduce the client’s ledger balance but not the supplier’s statement.
• Credit notes: Issued by supplier but not yet processed by the client.
• Disputed items: Amounts under query due to price/quantity or quality issues.
• Errors: Mispostings or duplications identified during reconciliation.

Worked Example 1.1

A supplier statement shows an ending balance of $12,000. The client’s ledger shows $10,000. On investigation, there is an invoice for $2,500 on the statement not yet recorded, and a payment of $500 recorded in the client’s ledger but not appearing on the statement.

Question: What audit actions should be taken regarding the $2,500 and $500 differences?

Answer:
The $2,500 invoice should be checked—if goods or services were received before year-end, it must be accrued. The $500 payment should be verified as being sent pre-year-end by reviewing bank records; it is an outstanding payment-in-transit and does not require adjustment if sent before year-end.

Substantive Audit Procedures for Payables and Accruals

Supplier statement reconciliation is a key substantive procedure to address the completeness assertion. Payables balances are understated if invoices received but not yet processed are omitted.

The main audit procedures include:

• Obtaining supplier statements for major (or selected at random) suppliers.
• Reconciling each supplier’s statement to the corresponding ledger balance, listing and investigating reconciling items.
• Testing a sample of reconciling items (e.g., unrecorded invoices and credit notes) to supporting documentation such as goods received notes, invoices, and payments.
• Reviewing after-date payments and invoices to identify liabilities existing at the year-end but not included in the accounts—requiring accruals.
• Considering supplier confirmations for selected balances—especially where a supplier statement is unavailable.
• Scrutinising aged payables listings for unusual trends or large old balances.

Key Term: Accrual
A liability recognised for goods or services received but not yet invoiced or recorded, ensuring expenses and payables are complete at the reporting date.

Audit Evidence: Supplier Statement vs. Supplier Confirmation

Supplier statements are sent routinely by suppliers and are independent third-party records. However, they may also contain errors or may be incomplete if not including all transactions to the reporting date.

Supplier confirmations are audit letters sent by the auditor directly to suppliers, requesting confirmation of account balances. Confirmations are sometimes more reliable where supplier statements are unavailable, but non-responses or partial replies limit their usefulness.

Key Term: Supplier Confirmation
A direct written response from a supplier confirming the balance owed by the client at the reporting date, used as audit evidence.

Investigating and Responding to Reconciliation Differences

Differences must be analysed:

• Invoices on supplier statement, not in ledger: Check if goods/services received before year-end. If so, accrue the invoice. Review goods received logs, delivery notes, or correspondence.
• Payments on the ledger, not on statement: Trace payment through the bank statement to confirm timing. If genuinely sent before year-end, usually requires no further action.
• Credit notes or disputed items: Verify their basis by reviewing correspondence or supporting documents. Disputed amounts may need provision if likely to result in payment.
• Invoices in the ledger, not on statement: Confirm posting accuracy; supplier may have omitted the transaction or sent an outdated statement.

If the supplier statement reconciliation cannot be fully explained, consider alternative procedures (such as reviewing post-year-end payments, correspondence, and confirming with the supplier).

Worked Example 1.2

During the reconciliation of Cube Ltd’s statement, a $7,000 invoice processed by Cube is absent from the supplier’s statement, and a $2,000 credit note issued by the supplier is not yet recorded by Cube.

Question: How should the auditor address these items?

Answer:
The auditor should confirm the $7,000 invoice relates to goods actually supplied and review whether the supplier has omitted the invoice in error. For the $2,000 credit note, ensure the reversal is processed in the client’s ledger, and consider whether this affects the payable at year-end.

Communicating Control Deficiencies

If supplier statement reconciliations are not performed regularly by the client, or unexplained differences are common, this is a control deficiency. The auditor must communicate significant control deficiencies in payables and purchase processing to management and, if serious, to those charged with governance (e.g., audit committee).

Key Term: Control Deficiency
A weakness in the design or operation of a control that may prevent timely detection or correction of misstatements.

Limitations and Challenges

Supplier statement reconciliations are only effective when reliable statements are available. Limitations include:

• Some suppliers may not send statements or may send them infrequently.
• Timing differences can complicate reconciliation.
• Large populations of small suppliers may make 100% reconciliation impractical; sampling is often necessary.
• Reliance on the client to request and retain statements may affect auditor independence.

Exam Warning

Auditors often overlook or inadequately investigate reconciling differences. Always document reasons for differences and ensure any necessary accruals or corrections are recorded before sign-off. Incomplete reconciliations can lead to uncorrected material understatements.

Revision Tip

Focus on the completeness assertion for payables—missing invoices typically understate liabilities. Practice supplier statement reconciliation, identifying timing, error, and completeness differences.

Key Point Checklist

This article has covered the following key knowledge points:

• The purpose and steps of supplier statement reconciliations in the audit of payables and accruals.
• Common reconciling items and their audit treatment.
• Key audit procedures for obtaining evidence over payables and accruals.
• The difference between supplier statement and supplier confirmation as audit evidence.
• Controls and deficiencies relating to supplier statement reconciliations and required communications.

Key Terms and Concepts

• Supplier Statement Reconciliation
• Reconciling Item
• Accrual
• Supplier Confirmation
• Control Deficiency