Scenario : (1000 Words) The Peak Sawmill Limited (Peak) operates a
timber sawmill in a large regional town. It sources its raw material
(pine logs) from a number of local growers and from its own plantations.
Logs are transported on large trucks that are weighed in on the
company’s weighbridge and weighed out after dropping their loads in the
storage area. Logs are then debarked and sawn to size in the cutting
area of the mill. The various logs are then sent to other areas of the
sawmill depending on what they will be used for. You are a senior
on the audit. In the planning stage of the audit, you perform analytical
procedures. In the current audit period, the average number of days to
pay creditors has declined significantly from the average recorded over
the past three financial years. Your investigation reveals that log
suppliers represent more than 90 per cent of the value of accounts
payable. As an internal control, details of the goods received notes are
matched against the supplier’s invoice. The accuracy of the invoice is
checked, after which the invoice is authorised for payment by the mill
accountant. Any discrepancy between what the supplier’s invoice amount
should be and the actual amount charged by the supplier is communicated
to the supplier by way of a pre-numbered ‘request for credit’ form. This
form provides reasons for the differences and the amount requested to
be credited to the company by the supplier. The correct amount of
the invoice is entered into the accounts payable accounting system and
the supplier’s monthly statement is reconciled to the accounts payable
balance per the creditors’ ledger at month end. The differences are
mostly attributable to: unprocessed invoices due to pricing differences timing differences in the recorded date of a payment made amounts requested for credit settlement discounts disallowed. Cathy
Vernon, the company’s financial controller, informs you that due to the
increase in the price of timber, new contracts with suppliers have been
negotiated over the past year. The accounts payable personnel have
complained that management is too slow in informing them about the
effective dates of the implementation of the contracts and the revised
prices. A brief inspection of the accounts payable reconciliations for
five of the biggest suppliers indicates that many invoices are being
held back due to the lack of correct pricing. Required (a) List two key assertions at risk in relation to accounts payable. (b) Provide your justification for each assertion. (c) For each assertion, outline one substantive test of detail to obtain sufficient appropriate audit evidence.
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