Author Topic: Supplier receipts as proof of payment - audit evidence  (Read 288 times)

joecav

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Supplier receipts as proof of payment - audit evidence
« on: September 01, 2010, 14:44:29 GMT »
Hi all

I've been involved with financial management issues in one particular country for some time, and in recent years some aspects of their PFM reform have been hampered by what, on the face of it, seems a conservative approach from the external auditors (and, to a lesser extent, internal auditors). The first aspect was an audit insistence on maintenance of traditional manual paper records alongside the new IT system - this was claimed to be based on inconsistencies or ambiguities in the relevant laws and financial regulations, which should be put right soon.

A second issue has been the insistence on obtaining and keeping supplier receipts, as proof of payment. So, for example, after paying Company X for the supply of school desks, the Education Ministry must obtain a receipt from Company X to prove that the company received the payment.

Now in my experience this seems well over the top. It would be much more usual that the auditor would rely on proof of the payment being issued, without the need to see receipts. Indeed, suppliers rarely issue receipts. But what arguments can be used to persuade auditors reluctant to let go of their past reliance on supplier receipts ?

The first would be the Audit Standard which says that only "reasonable" assurance is required; a second would be the internal check provided by suppliers who would complain loudly if payments didn't reach them. A third might be the legal (well sort of) argument that once a payable order has been issued using bank details provided by the supplier, the payment can be viewed as paid or at least issued. If it's banked by someone else, then that's between the supplier and the bank and not the payer's problem.

But does anyone know of any other argument (or better still, authoritative view) which could be brought to bear ?

All views welcome .... And feel free to tell me if I'm being unreasonable !


« Last Edit: September 01, 2010, 20:05:06 GMT by joecav »

atseacliff

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Re: Supplier receipts as proof of payment - audit evidence
« Reply #1 on: September 02, 2010, 09:05:12 GMT »
Hi

I'm interested that you frame the discussion in terms of supplier receipts. To my mind the broader concern of the auditor should be in gathering sufficient and appropriate audit evidence to reach a conclusion that both expenditures and accounts payable are fairly stated in the financial statements. In the hierarchy of risks auditors are typically concerned with errors which might result in the understatement of both. There can be a variety of reasons for understatement - e.g. late receipt of invoices, invoices which are in dispute not finding their way into the accounting system. The tests you've outlined in the post aren't going to address this more usual concern - you will have some assurance that an invoice was valid and had been settled but not the completeness of the population as a whole.

You also state that supplier rarely issue receipts. If you refer to an individual confirmation of receipt of payment that is true however, at least in the UK major suppliers issue a monthly statement showing the amounts invoiced and payments received.  Auditors (both internal and external) ask for this to be retained in order that they can check year end account payables; and by definition also getting assurance on the completeness of credit purchases. As a generalisation the reliability of audit evidence is increased when it is obtained from independent sources outside the entity (International Statement on Auditing (ISA 500 - A31). In fact when I was an auditor I designed my sample of accounts payables prior to obtaining the monthly statements - where one was absent I would conduct a circulation - again providing assurance from sources outside the entity.

I hope the above is useful - you framed the issue in a slightly different way from my response but that is because I suspect that the auditors objectives are broader than your post implies. It is always useful to clarify the objectives of any test the auditors carry out where it isn't immediately obvious - far too often young audit staff have little idea of the reason they are conducting a particular procedure!  One final thought - you ask for an authoritative view - ISA 500 isn't going to give you that but it does provide general guidelines on the information to be used as audit evidence.


 


joecav

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Re: Supplier receipts as proof of payment - audit evidence
« Reply #2 on: September 10, 2010, 12:03:21 GMT »
Hi

Thanks for the full response and helpful steer.

The problem narrows a little, in that this particular entity accounts on a cash basis, using a "month 13" to mop up payments issued in-year but cashed after the year end. There's no accounts payable, or at least in any form we'd recognise. So the audit test is to ensure that payments recorded in the books have indeed been paid, and (I'd need to confirm this) that it was paid to the right person for the services or goods provided. The Audit Office have been requiring audited agencies to obtain individual receipts from suppliers for payments made, even though there'll already be a string of prior evidence starting with intention to spend, requisition or earmarking of funds, supplies order, supplier invoice, goods received note, payment request, payment order and banking records (there's an enormously long chain of procedures and paperwork, including pre-audit, before a payment is issued).

I'll be able to explore this in a little more detail when I carry out my next mission there, to understand if I'm missing something about what the auditors are trying to achieve. My guess is that this is a hangover from the days before the government introduced a modern IFMIS, when a manually-generated payment order could end up anywhere. Just to give you an idea of how bad things were then, government always had to pay in advance for goods because suppliers got fed up with never receiving payment for goods they'd supplied. These things are changing slowly, and for the better, now that the IFMIS is operational.

Best regards





atseacliff

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Re: Supplier receipts as proof of payment - audit evidence
« Reply #3 on: September 10, 2010, 13:08:41 GMT »
Hi

Interesting. That being the case I would share your concerns regarding the objective of this test. You seem to imply that the introduction of the IFMIS has reduced errors and that the purchasing cycle is well documented. If there is an improvement in the internal control environment (implied from your note) the auditors should be able to document and test these controls; thereby reducing the level of detailed testing of invoices. When you are next on mission you might question the auditors on how their approach has evolved to address the new systems and improved control environment.

All the best

 

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