## Learning Outcomes

After reading this article, you should be able to explain the audit objectives, common risks, and key procedures for purchases, payables, and accruals—in particular, completeness and cut-off testing. You will recognise the importance of supplier statement reconciliations, understand the application of directional testing, and know how to design and interpret substantive procedures to detect unrecorded liabilities and cut-off errors for ACCA Audit and Assurance (AA).

## ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand both the rationale and practical techniques for auditing purchases, payables, and accruals, with emphasis on completeness and cut-off. Relevant syllabus areas for revision include:

- The assertions relating to classes of transactions (purchases/expenses) and account balances (payables, accruals), especially completeness, cut-off, and occurrence.
- Substantive procedures for purchases, payables, and accruals (including supplier statement reconciliations and after-date payments).
- Tests of controls and direction of testing for liabilities.
- Cut-off testing around the period end for purchases and payables.
- The use of analytical procedures in payables and accruals.
- Identifying and responding to control deficiencies within the purchases and payables system.
- The impact of deficiencies and undetected errors on the financial statements.

## Test Your Knowledge

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

1. Which audit assertion is most directly tested when checking after-date payments to suppliers?
2. What is the audit risk if invoices received after the year-end relating to current year deliveries are omitted from the financial statements?
3. Explain the substantive procedure for reconciling supplier statements to the client's payables ledger.
4. Describe a cut-off error scenario in the purchases system and its financial statement impact.

## Introduction

Purchases, payables, and accruals are frequently significant balances in company accounts. The main audit risks are omissions (incomplete recording of liabilities or expenses) and cut-off errors (incorrect period allocation). Because management may have incentives to understate expenses or liabilities, auditors must design procedures to detect unrecorded amounts and ensure all relevant obligations and costs are recognised in the correct financial period.

> **Key Term: Completeness assertion**
> The statement that all transactions and balances that should be recorded have been, and that nothing is omitted from the accounts that ought to be included.
> **Key Term: Cut-off assertion**
> The statement that transactions are recorded in the correct accounting period, particularly at the period end.
> **Key Term: Accrual**
> A liability recognised for expenses incurred but not yet invoiced or paid at the reporting date.
>
> **Test Tip:**
> When revising Completeness and cut-off testing, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### Audit Objectives for Purchases, Payables, and Accruals

The auditor’s objectives are to obtain sufficient and appropriate evidence to conclude that:

- All expenses, payables, and accruals are completely recorded (completeness).
- Period-end balances and expenses relate to the correct period (cut-off).
- Balances are not overstated with invalid or duplicate entries (existence/occurrence, accuracy).

Failure to address completeness and cut-off increases the risk of material understatement in expenses and liabilities—critical errors that directly impact profit and financial position.

### Understanding Controls and Common System Risks

A robust purchases and payables system includes requisition, ordering, receipt of goods/services, invoice processing, and payment authorisation. Weaknesses—like missing sequence checks, lack of reconciliations, or poor segregation—raise the risk of missing liabilities, duplicate payments, or cut-off errors.

Common risks include:

- Goods/services received before year-end for which invoices arrive after year-end, and are omitted.
- Incomplete recording of expenses with no supporting invoice at period end.
- Supplier statements not reconciled, so missing invoices or disputes go undetected.
- Inadequate cut-off procedures between financial periods.

### Directional Testing for Completeness: How Auditors Detect Omissions

Directional testing for payables and accruals means starting with external evidence (such as supplier statements, goods received notes, or after-date invoices) and tracing into the accounting records to confirm inclusion.

![Directional testing for liabilities completeness and assets existence using opposite tracing paths between external documents and ledger records.](https://static.pastpaperhero.com/images/acca-aa-purchases-payables-and-accruals-completeness-and-cut-off-testing_00.png)

_Directional testing maps liabilities completeness from external evidence to the ledger and assets existence from ledger balances to source documents._

> **Key Term: Directional testing**
> An audit approach where tests are designed in the direction most likely to reveal material understatement for liabilities—starting outside the records and tracing into the accounts.

This differs from overstatement testing (e.g., for assets), where the auditor selects sampled balances and traces back to supporting evidence.

### Worked Example 1.1

A company receives a supplier statement showing an invoice dated before year-end for goods delivered pre-year-end. The invoice arrived after reporting date and has not been recorded.

**Question:** What is the risk, and how should the auditor respond?

> **Answer:**
> There is a risk of omission of a liability and corresponding expense (completeness risk). The auditor should trace the invoice and delivery note from the supplier statement into the payables ledger and accruals listing, and if missing, propose an accrual.

### Cut-off Testing in Purchases and Payables

Cut-off errors occur when transactions around period-end are recorded in the wrong year, often because goods are received or invoices dated close to year-end. Properly applied, cut-off procedures ensure only transactions relating to the correct period are included.

Auditors test cut-off by:

- Inspecting goods received notes (GRNs), delivery notes, and purchase invoices dated before and after year-end.
- Testing whether purchases and liabilities for goods received before year-end—but invoiced after—are accrued.
- Reviewing after-date payments and invoices to identify unrecorded liabilities.

### Worked Example 1.2

Goods worth £10,000 are delivered on the last day of the year but the supplier’s invoice is not received until two weeks later and remains unrecorded at year-end. What is the effect if not accrued?

> **Answer:**
> Purchases/expenses and payables will be understated by £10,000. Profit and net assets will be overstated.
>
> **Exam Warning:**
> Incomplete payables or missed accruals are a common cause of material misstatements and are often assessed in ACCA exams. Always show the link between procedures and the completeness/cut-off assertion in your answers.

### Audit Procedures: Substantive Approaches for Completeness and Cut-off

Key procedures to address completeness and cut-off include:

- Obtain the listing of trade payables and accruals; cast and agree totals to financial statements.
- Circularise or reconcile supplier statements to the purchases ledger, investigating discrepancies or invoices outstanding on the statement but absent from the ledger.
- Review goods received notes and unmatched GRNs at period end and trace to subsequent invoices and accruals.
- Inspect after-date invoices and payments, selecting those relating to pre-year-end purchases not yet recorded. Where identified, ensure suitable accrual.
- Examine significant suppliers from prior periods to check none are missing in the current listings.
- Verify that manual accruals are supported by documentation and reasonable calculation.
- Review the purchases cut-off by inspecting purchase invoices and delivery notes dated just before and after period end and agreeing their treatment.

### Worked Example 1.3

You review a major supplier statement dated 2 January. It shows several invoices dated in December that are not on the payables ledger. The goods were received before year-end.

**Question:** What steps do you take, and what is the likely adjustment?

> **Answer:**
> Trace the missing invoices to delivery documentation to confirm goods were received pre-year-end. If so, propose an accrual and adjust purchases/payables upwards. Document findings and raise with management.

### Analytical Procedures and Other Substantive Work

In addition to detail testing:

- Compare payables and accruals to prior periods; investigate significant changes.
- Calculate the payables payment period and compare for consistency.
- Analyse expense categories against expectation and budget.

### Supplier Statement Reconciliation: A Critical Audit Procedure

Supplier statements (third party documentation) often provide the strongest evidence for the existence and completeness of payables. Reconciling major supplier statements will identify:

- Unrecorded liabilities (completeness).
- Disputes, timing differences, or errors (which must be followed up).

Where statements are absent for significant suppliers, external confirmation or alternative procedures should be considered.

### Accruals: Ensuring Expenses Are Not Omitted

Accruals are recognised for obligations to pay for goods or services received but not yet invoiced. Key steps:

- Review lists of accruals; agree to supporting schedules.
- Recalculate accrued amounts based on contract terms or pro-rata calculations.
- Confirm justification for manual accruals with responsible personnel.
- Review after-date invoices as evidence for required accruals at the reporting date.

### Communicating Deficiencies and Reporting Implications

Where significant deficiencies in the purchases or payables system are identified—for example, absence of regular supplier statement reconciliations, or missing sequence checks—report them to management and those charged with governance under audit standards.

## Summary

Completeness and cut-off testing for purchases, payables, and accruals are critical to ensure all obligations are recognised and matched to the correct accounting period. Auditors rely on supplier statement reconciliations, after-date payment analysis, and directional testing from external to internal records to detect unrecorded expenses or liabilities. Failure to perform these procedures may result in material misstatements and incorrect profit reporting.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- State audit assertions relevant to purchases, payables, accruals—especially completeness and cut-off.
- Explain why liabilities and expenses can be understated and the implications for financial statements.
- Describe and apply substantive procedures: supplier statement reconciliation, after-date testing, and cut-off tests.
- Define and apply directional testing for the completeness of payables and accruals.
- Identify, evaluate, and report deficiencies in the purchases and payables cycle.
- Calculate and interpret payables-related analytical ratios for reasonableness checks.

## Key Terms and Concepts

- Completeness assertion
- Cut-off assertion
- Accrual
- Directional testing


Purchases, payables, and accruals - Completeness and cut-off testing