Question

R12.6: Explain a typical control preventing, or detecting and correcting, payments to a fictitious vendor.?

R12.9: Explain how examining subsequent payments paid after the balance sheet date (or a cutoff date) is a useful test of the completeness of purchases and payables.?

Answer 1

Answer R12.6

Control risk s those risk which arises due to non-prevention, detection & correction of risk associated with the internal control system.

Management can typically use the following for preventing or controlling and detecting of payment made to fictitious vendor:

• Segregation of Duties: Management should segregate the duties of the various role such as procurement of raw material to pay for the transaction so that prevent the payment made to the fictitious vendor
• Control System related to the recording of vendor details: Management should record the transaction of each vendor & create some control like duplication of invoices, contact details, mail id, etc. so that fictitious payment will be prevented, corrected or detected on early basis
• Management should ensure security while hiring the employees such as their financial background etc
• Management should create such an environment so that employees or others may report for any irregularities observed in their knowledge

Answer R12.9

Cut off procedure means segregation of transactions from one period to another in which they relate. Cutt off procedure ensures that goods purchased for the current year are properly recorded in that period & not on the subsequent period & also ensure goods sold have been removed from the inventory.

Examining subsequent payments paid after the balance sheet date (or a cutoff date) is a useful test of the completeness of purchases and payables as:

• Any payment made to creditors or other person helps in ensuring that goods has been included in the current year as inventory for which subsequently payment have been done.
• It helps the auditor to ensure the completeness of a transaction as if payment is not made or received then management should record such payable in their books of account & after examining this they can conclude that amount is truly carried in the books of account.
• Subsequent payment paid after the balance sheet date also help in verifying the inventories & purchase records or other expenses shown in the financial statement.