A general assumption that audit firm have, that companies overstate assets and understate liabilities. It also has to do with double entry system. e.g. creditors and purchases. If one is correct then most likely the other is correct also.
The techniques used are:
- Review payments after balance sheet date and matching them against related invoices specifically noting dates on invoices to ensure that the invoice was accounted for in the correct accounting period.
- Cut-off tests, which involve selecting goods, received notes raised before the year-end and ensuring that the related invoices have been included in the purchases daybook before year-end as well as individual creditors accounts. If no invoices have been received to match those goods received notes than a reasonable liability should have been set up.
- Comparison of the present list of creditors with the previous year’s list and investigations being carried out on those creditors on the list of the previous year missing from current years list to confirm that they are properly excluded through settlement during the year under review.
- Reviewing reconciliation of creditors statements with the creditors individual ledger accounts ensuring that any reconciling items are valid and genuine.
- Reviewing lending contracts or agreements for breach of contract accusations to determine where claims would be made against the company.
- Reviewing correspondence with professional advisers e.g. lawyers for claims that they may have made against the company but not recorded.