Monday morning, the first day of the audit. Before Alan opens a single file, Nadia tells him about the credit notes in the two sentences she prepared. Then he walks through the process with her and Aisha, one document at a time, and asks to see the evidence for every answer.
Morning, both. Before we start on purchase-to-pay, is there anything I should know?
Many auditors start with exactly this question. It is an invitation to disclose. What you say in the next minute shapes how the rest of the audit feels.
There is, and I'd like to say it before you open anything. We found a cut-off problem with credit notes in this year's close, and we've corrected it. It may also have existed last year, and we'll check and send you the result by the twentieth.
These are the exact two sentences Nadia prepared with Graham, with one short line in front. She does not add a third sentence, explain or apologise. She gives the auditor the facts and a date, and stops.
Thank you. Graham mentioned it to my partner on Friday, so it isn't a complete surprise. But I'm glad it came from you first.
That was the idea.
How big is it, roughly?
Eleven credit notes, two hundred and eighty-six thousand. The effect on profit was a hundred and sixty-eight, so above materiality. Nine are corrected. Two small ones, seven thousand together, stayed in January under the threshold we agreed at planning.
Nadia gives the count, the total, the real effect, the comparison to materiality and what was done, in four short sentences. An auditor will check every number later; a clear summary now tells him where to look.
All right. I'll want the list, the journals and the approvals. But let's do the walkthrough first, and you can show me those as we go.
So, walk me through it. A supplier sends you a credit note. What happens to it, step by step?
This is what a walkthrough is: the auditor follows one transaction from start to finish to see whether the process works as described. "Step by step" tells you he wants the order, not a summary.
It arrives in the payables inbox, usually as a PDF. Someone in payables checks it against the supplier account, and records it in the system.
Which date do they record it under?
Until last week, the date they received it. From today, the date on the document. That's the change we made.
Alan asks a precise question, and Nadia answers with the old practice, the new one and when it changed. In an audit, "until last week… from today…" is better than describing only the new process, because the auditor is testing the year that has just ended.
And is there anything written down about that change, or is it an email to the team?
An email for now. The written procedure is being updated this week. I can send you both.
Please. Then what happens after it's recorded?
At the month-end, I reconcile the supplier statements for our top twenty suppliers against our ledger. If a credit note is on their statement and not in our ledger, or in a different month, it shows up as a difference.
Aisha speaks when the process reaches her step. She describes what she does and what it catches, in plain words. In a walkthrough, each person explains the part they own; the manager doesn't need to speak for everyone.
Only the top twenty?
Yes. They cover about eighty per cent of what we buy.
When do you ask the suppliers for their statements?
Before the break, for a statement dated the thirty-first. Fourteen confirmed before Christmas. The statements came in during the close, and the last ones arrived on day four.
And did any of them change anything?
One had a difference of about two thousand. A delivery charge they'd invoiced twice. Their mistake, not ours, and they've sent us a credit for it.
Good. Put that in the file as well, with their credit.
The two-thousand-pound difference from day three now has a name: a duplicate charge on the supplier's side. Aisha explains it in two sentences and says who made the mistake without making it a complaint. Small items closed properly are part of what an auditor looks for.
So a credit note from a smaller supplier, recorded in the wrong month, wouldn't be caught by your reconciliation.
No. It wouldn't.
Alan finds a limit in the control. Aisha does not defend it or explain it away. "No. It wouldn't." is short and honest. An auditor trusts a team more when it admits what a control doesn't do.
That's why the new check is on credit notes over five thousand, from any supplier, not only the top twenty. I'll review them myself in the first week of every quarter.
Good. But that starts this quarter, so there's nothing I can test this year.
Correct. There's nothing to test until the end of March.
Nadia could say the new check "would have caught it". Instead she agrees: it does not exist yet, so it cannot be tested. Promising more than you can show is the quickest way to lose an auditor's trust.
Let's take one. The Ferrand credit note. Can you show me where it is now?
The auditor's key phrase. He is not asking you to tell him; he is asking you to show him. Prepare to open the document, not to describe it.
Here. The original posting, on the second of January. And here, the journal that moves it back into December. Same amount, a hundred and forty-eight thousand.
And the credit note itself?
Attached to the journal. Page two of their statement as well.
That's helpful. Who approved the journal?
Graham, on day four. You can see his approval in the system, with the time.
I can. And the journal was prepared by?
By me. So the person who prepared it and the person who approved it are different.
Nadia names the point Alan is checking before he asks: one person prepared the journal and another approved it. Auditors call this segregation of duties. Saying it out loud shows you understand why the question matters.
Thank you. That's the one I'd pick for my file. Now, the rebate side. Matteo's accrual for Ferrand was replaced by the credit note, I assume?
Yes. His estimate was reversed in a separate journal, and the true-up is in a third one. All three are on one line in the summary I'll send you.
Three journals rather than one corrected one.
That was deliberate. We wanted you to see what we knew on day two and what changed.
It shows. I wish more clients did that.
At the kickoff, Nadia insisted on separate journals so the auditors could see the history. Here it pays off. Small process decisions made under pressure are often the ones that matter most later.
Two of the eleven were Rotterdam's suppliers. Was their side corrected too?
On day four. Their controller sent me the journals, and they're in the same folder.
And does intercompany still agree after the corrections?
It does. I checked it again on day five, because I didn't want to fix one thing and break another.
A correction in one place can create a difference somewhere else. Nadia checked that the intercompany balances still agreed after the change. "I didn't want to fix one thing and break another" is a simple way to show you think about side effects.
How do payables know that a document is a credit note and not an invoice? Is it the supplier's label, or does someone decide?
I think it's the supplier's label, but I'm not sure. I don't work in payables. I'd rather check than guess.
Under pressure, people fill silence with a confident guess. Aisha gives her best understanding, says clearly that she isn't sure, and offers to check. In an audit, a wrong answer is much worse than "I'll find out".
That's the right answer. Can you find out by tomorrow?
Yes. I'll ask the payables lead today and send you what she says, with an example.
Thank you. Next one. The two small credit notes you left in January. Where do I see those?
On the list of uncorrected differences, with the reason next to each one: under the threshold agreed at planning.
Leaving something uncorrected is acceptable in an audit if it is written down, with a reason, in the right place. Nadia can say exactly where it is. "We left it" with no list would be a problem.
Good. I'll want that list as well. And last year. You said you'll know by the twentieth.
Yes. Aisha and I start next week, once her reconciliations are signed off.
Then I'll hold my view on last year until then. I'd rather wait for your numbers than make up my own.
Alan chooses not to form an opinion before the evidence arrives. It mirrors Aisha's answer a minute earlier: check, don't guess. Good audit conversations often sound like this, with both sides refusing to fill gaps with assumptions.
Can I ask something? Is this going to be a finding?
Aisha asks what everyone in the room is thinking. It is a fair question, and asking it directly is better than worrying about it for three weeks.
Probably, yes. A control didn't work, and it was above materiality. But a finding about a control is not the same as a finding about people. And the fact that you told me first will be in my notes.
An audit finding records a weakness in a control and what the company will do about it. Alan separates it from blame, and tells them that the way they handled it will also be recorded. That last sentence is the reward for telling him first.
And what happens with a finding? Who sees it?
It goes into a letter to management, with your response next to it. Before it's final, we meet and agree the wording.
We'll want to talk about the wording.
Everyone does.
A finding is written, discussed and agreed before it becomes final. Nadia signals early that she will want a say in how it is phrased. Alan's two-word reply tells you this is a normal part of every audit.
Let me say back what I've asked for, so we agree on the list.
Please.
One, the list of eleven credit notes, with the journals and approvals. Two, the email about the new posting date, and the updated procedure when it's ready. Three, how payables tell a credit note from an invoice, by tomorrow. Four, the list of uncorrected differences. And five, last year's results, by the twentieth.
Alan lists exactly what he needs, numbered, with dates where they matter. Listen for how short each item is. If you are on the receiving end, write it down as he says it, and check it against your own notes before you leave the room.
That matches my list. Except you said "by tomorrow" for number three, and I'd like to make it Wednesday morning. Payables are short-staffed on Mondays.
Nadia agrees with the whole list and changes one date, with a reason. "That matches my list, except…" is a clean way to accept almost everything and still ask for the one change you need.
Wednesday morning is fine.
Then I'll send it on Tuesday if I can, and Wednesday morning at the latest.
Even better. And tomorrow I'll pick a sample of twenty-five credit notes from January and February, from any supplier. Just so you know it's coming.
Alan warns them about his next test. It is the same principle Graham set at the kickoff, "no surprises", now coming from the auditor's side.
For the sample, should I put the documents in a folder for you?
No, I'll pull them from the system myself. If I can't find something, I'll ask you. That's part of the test.
Aisha's offer is kind, but Alan declines. If the auditor picks the documents himself, he can see whether the system and the filing really work. Preparing a neat folder for him would hide exactly what he is testing.
From any supplier, you said. Not only the top twenty.
Not only the top twenty. You'll understand why.
I do. That's exactly where I'd look.
Then we're thinking the same way, which makes my job easier. Thank you both. This was a good start.
Thank you. I'll have the payables answer to you by Wednesday.