Statutory Audit of Trade Payables in Indian Companies [Company Law]

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Introduction:

Trade payables are amounts a company owes to its suppliers for goods or services purchased on credit. They represent a significant component of a company’s current liabilities and must be accurately recorded and reported to reflect the true financial position of the company. This guide provides detailed audit procedures, common queries, and practical examples for auditing trade payables in Indian companies, considering relevant legal frameworks and regulations.

Legal Framework and Regulatory Requirements

1. Companies Act, 2013
   • Section 128: Requires every company to maintain accurate books of account that reflect a true and fair view of the company’s financial position.
   • Section 129: Stipulates that financial statements must comply with the prescribed accounting standards and provide a true and fair view of the company’s state of affairs.
   • Schedule III: Provides the format for financial statements, including the classification and disclosure of trade payables under current liabilities. It specifies that trade payables should be segregated into dues to micro and small enterprises and dues to other creditors.
   • Section 134: Requires the directors to ensure proper maintenance of accounting records and compliance with applicable accounting standards.
2. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
   • Section 15: Mandates that payments to micro and small enterprises should be made within 45 days from the date of acceptance or deemed acceptance of goods or services.
   • Section 16: Provides for the liability of interest on delayed payments to micro and small enterprises.
3. Indian Accounting Standards (Ind AS) and Accounting Standards (AS)
   • Ind AS 1 / AS 1 – Presentation of Financial Statements: Ensures that financial statements present a true and fair view, including proper classification and disclosure of trade payables.
   • Ind AS 37 / AS 29 – Provisions, Contingent Liabilities, and Contingent Assets: Addresses the recognition and measurement of provisions, contingent liabilities, and contingent assets, which may affect trade payables.
   • Ind AS 32 / AS 30 – Financial Instruments: Presentation: Provides guidelines for the presentation of financial instruments, including trade payables.
4. Goods and Services Tax (GST) Laws
   • GST Act: Impacts the recognition and classification of trade payables, especially concerning input tax credits and reconciliation of supplier invoices. Companies must ensure that GST-related liabilities are accurately reflected in trade payables.

Detailed Audit Procedures

1. Understanding the Trade Payables Structure
   • Identify Key Suppliers: Determine major suppliers and review trade agreements and payment terms.
   • Review Purchase Orders and Agreements: Understand terms of payment, discounts, and penalties to ensure proper recording.
2. Verification of Trade Payables
   • Obtain Supplier Confirmations: Request direct confirmations from suppliers to verify the balances recorded in the books.
   • Review Supplier Statements: Compare supplier statements with the company’s records to identify discrepancies.
   • Check Payment Terms: Ensure that the terms of payment are correctly recorded and adhered to.
3. Compliance with Accounting Standards
   • Ind AS 1 / AS 1: Verify that trade payables are classified correctly under current liabilities and disclosed in accordance with the standards.
   • Ind AS 37 / AS 29: Assess whether any contingent liabilities or provisions related to trade payables are appropriately recognized and disclosed.
   • Ind AS 32 / AS 30: Ensure that trade payables are presented accurately in the financial statements and measured at amortized cost.
4. Review of GST Compliance
   • GST Reconciliation: Verify that GST payables are accurately recorded and reconcile with the GST returns filed.
   • Input Tax Credit: Ensure that input tax credits related to trade payables are properly claimed and supported by valid invoices.
5. Review of Payments and Accruals
   • Check Payments: Verify that payments made to suppliers are correctly recorded and that outstanding payables are accurately reported.
   • Review Accruals: Ensure that expenses related to trade payables are accrued correctly in the financial statements.
6. Subsequent Events Review
   • Examine Post-Balance Sheet Events: Assess any events occurring after the balance sheet date but before the audit report date that might affect the classification or disclosure of trade payables.

Common Queries and Confusions

1. Classification Issues: Distinguishing between trade payables and other liabilities. Ensure trade payables are classified under current liabilities, and non-trade payables are classified separately.
2. Disclosure Adequacy: Ensuring that all required disclosures, including outstanding dues to micro and small enterprises and other creditors, are made in accordance with Schedule III.
3. GST Implications: Properly accounting for GST-related liabilities and reconciling them with GST returns.
4. Interest on Delayed Payments: Calculating and disclosing interest on delayed payments to micro and small enterprises as required by the MSMED Act.

Practical Examples

1. Example 1: Outstanding Dues to Micro and Small Enterprises
   • Scenario: A company has outstanding dues to a small supplier exceeding the 45-day payment term.
   • Audit Approach: Review supplier invoices, payment terms, and board resolutions. Verify interest calculations on delayed payments.
   • Practical Insight: Ensure compliance with the MSMED Act by calculating and disclosing interest on delayed payments and verifying timely settlement of dues.
2. Example 2: Discrepancy in Supplier Statements
   • Scenario: A supplier’s statement shows an outstanding balance that differs from the company’s records.
   • Audit Approach: Obtain a confirmation from the supplier, compare with the company’s records, and investigate discrepancies.
   • Practical Insight: Ensure that discrepancies are resolved and reflected accurately in the financial statements. Verify that any differences are appropriately reconciled.
3. Example 3: GST on Trade Payables
   • Scenario: The company has recorded trade payables with GST, but the input tax credit claimed does not match the supplier invoices.
   • Audit Approach: Reconcile GST payables with GST returns and supplier invoices. Verify the accuracy of input tax credit claims.
   • Practical Insight: Ensure proper recording of GST-related liabilities and accurate claim of input tax credits. Verify compliance with GST regulations.
4. Example 4: Payment Terms and Discounts
   • Scenario: A supplier offers discounts for early payment, but the company records the payable at the gross amount.
   • Audit Approach: Review the supplier agreement for discount terms and verify the recording of discounts in the financial statements.
   • Practical Insight: Ensure that discounts are recorded correctly and that payables are reflected net of discounts if applicable.
5. Example 5: Accrued Expenses
   • Scenario: The company has accrued expenses for services received but not yet invoiced.
   • Audit Approach: Review the accruals and supporting documentation for accuracy. Ensure that expenses are recognized in the correct period.
   • Practical Insight: Verify that accrued expenses are properly recorded and that corresponding trade payables are accurately disclosed.
6. Example 6: Supplier Credit Facilities
   • Scenario: A company has availed a credit facility from a supplier, and the balance has been recorded as a payable.
   • Audit Approach: Review the credit facility agreement, confirm the balance with the supplier, and verify the terms of the credit facility.
   • Practical Insight: Ensure that the credit facility is accurately classified and disclosed as a trade payable, and that terms and conditions are properly reflected.
7. Example 7: Unrecorded Liabilities
   • Scenario: Trade payables are not recorded for goods received towards the end of the financial year.
   • Audit Approach: Review receiving reports, purchase orders, and subsequent invoices to ensure all liabilities are recorded.
   • Practical Insight: Ensure that all trade payables for goods and services received are recorded in the correct accounting period to reflect accurate financial statements.
8. Example 8: Payment to Related Parties
   • Scenario: Payments are made to related parties, and the terms are not disclosed as per regulatory requirements.
   • Audit Approach: Review transactions with related parties, verify terms, and ensure proper disclosure in the financial statements.
   • Practical Insight: Ensure that transactions with related parties are disclosed appropriately and in accordance with regulatory requirements.
9. Example 9: Foreign Currency Trade Payables
   • Scenario: The company has trade payables in foreign currencies, and exchange rate fluctuations impact the recorded amount.
   • Audit Approach: Review foreign currency payables and their valuation at the reporting date. Verify the accuracy of foreign exchange gains or losses.
   • Practical Insight: Ensure that foreign currency payables are accurately translated and reported, and that exchange rate effects are properly accounted for.
10. Example 10: Provisions for Trade Payables
    • Scenario: The company has recorded provisions for potential disputes with suppliers but has not disclosed the nature of these provisions.
    • Audit Approach: Review the basis for provisions, assess their adequacy, and ensure proper disclosure in the financial statements.
    • Practical Insight: Verify that provisions are appropriately recognized and disclosed, and that any related contingent liabilities are accurately reported.

Conclusion

Auditing trade payables requires a thorough examination of agreements, supplier confirmations, compliance with accounting standards, and accurate recording of GST-related liabilities. Addressing common queries and following detailed procedures ensures that trade payables are accurately presented and disclosed in the financial statements.

Author

CA Sourabh Kothari (C.A., B.Com)
He is currently working as Partner – Risk and Transaction advisory with a renowned firm in Jaipur having experience in Internal Audit, IFC Audit, Business consultancy, Due Diligence and Management consultancy.
E-mail: Sourabh.kothari@jainshrimal.in | LinkedIn: Sourabh Kothari

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