Question

1. Outline controls that should be incorporated into the trade payables system (i) For creation of trade payables,

Answer 1

Controls are always implemented to mitigate or minimize the risk associated with the process to the possible extent.

To outline the controls let us first analyze the risks associated to the trade payable.

1. For creation of trade payable there should always be an Invoice and purchase authorization for the same. Also the goods and services should have been received other wise creation of trade payable is meaningless since the company has not incurred such cost but we are creating a liability.

2. Any Invoice received while creating a liability, it should be checked if the same invoice has already been received and processed. If the same is not checked then the duplicate invoice would be created and the payment would be made for the same. This results in double payment to the vendor and will create a loss.

3. Payment made to fictitious vendors and payment may not be made to the correct amount- These vendors may not have provided the services. To ensure that payment is made to the amount of goods or services provided and payment is made only after availing the benefit from the vendor, a control called three way match that is checking whether the company has authorized to avail the service or goods, and getting a confirmation that goods or services are availed and invoice has been received for the same. Only after these three checks the payment should be made.

4. Trade payable balance may be incorrect- When goods or services are received a liability is created and when they are repaid the liability is reduced and also entries such as discounts and rebates given by the vendor accounted in trade payable account. To ensure that these accounting is correctly done an external reconciliation statement should be obtained from the vendor and reconciled with the vendor balances so that an error will be found