Audit objective
Verify that all amounts owed to suppliers for goods and services received are recorded completely, accurately, and in the correct period, classified correctly between MSME and non-MSME, and disclosed per Schedule III and the MSMED Act, 2006. The inherent risk direction here is understatement: management has an incentive to keep liabilities off the books or push them into the next period. Completeness, not existence, is usually the dominant assertion.
Relevant framework
- IND AS 1 / AS 1 · Presentation of Financial Statements · current vs non-current classification
- IND AS 109 · Financial Instruments · payables as financial liabilities, amortised cost, derecognition on settlement
- IND AS 21 / AS 11 · Foreign Exchange · restatement of foreign currency payables at closing rate
- IND AS 37 / AS 29 · Provisions, Contingent Liabilities · distinction between accrued liabilities and provisions
- IND AS 8 / AS 5 · Accounting Policies, Changes in Estimates and Errors · prior period adjustments to payables
- Section 129 · True and fair view requirement
- Section 134(5) · Directors' Responsibility, internal financial controls over payables
- Schedule III Div I & II · Trade Payables bifurcated MSME / Others, ageing schedule required
- Trade Payables ageing schedule: <1 year, 1-2 yrs, 2-3 yrs, >3 years, separately for MSME and Others
- Trade Payables due for payment split between Disputed and Undisputed dues, each further split MSME / Others
- Unbilled dues (goods received not invoiced) included in ageing where due date determinable, else by transaction date
- Note disclosure of principal and interest accrued and remaining unpaid to MSME suppliers per MSMED Section 22
- Section 2 · Definitions of micro, small, medium enterprises (revised classification effective 01 Jul 2020, based on investment AND turnover)
- Section 15 · Buyer liable to pay on or before agreed date, or within 45 days of acceptance where no agreement exists
- Section 16 · Interest on delayed payment, compound interest at three times the RBI-notified bank rate, from the appointed day
- Section 22 · Mandatory disclosure in the buyer's financial statements: principal and interest due remaining unpaid, interest paid during the year under Sec 16, interest due and payable for the delay period, interest accrued and remaining unpaid, further interest due in succeeding years
- Section 23 · Interest under MSMED Act not allowable as deduction under Income Tax Act
- 3(vii)(a) · Regularity in depositing undisputed statutory dues (GST, PF, ESI, income tax, customs, excise, VAT, cess, etc.); arrears outstanding beyond six months from the date payable to be specified
- 3(vii)(b) · Statutory dues not deposited due to a dispute, amount involved and forum where pending
- Transactions not recorded in books, surrendered or disclosed as income in tax assessments, and whether previously unrecorded income has been properly recorded
- Section 40(a)(ia) · Disallowance for non-deduction or non-deposit of TDS on payments to residents
- Section 43B(h) · Deduction for interest on MSME dues under MSMED Sec 23 allowed only on actual payment, inserted by Finance Act 2023, effective AY 2024-25
- Section 36(1)(iii) · Interest on borrowed capital, relevant where payables include deferred payment arrangements with implicit interest
- Section 16(2) · ITC conditions, including payment to supplier within 180 days of invoice, failing which ITC is added back with interest under Rule 37
- Section 9(3) / 9(4) · Reverse Charge Mechanism on specified supplies and supplies from unregistered persons (where notified)
- Section 16(2)(aa) · ITC matching against GSTR-2B
- Section 122 / 125 · Penalty provisions where vendor invoices are found non-genuine
- SA 230 · Audit Documentation
- SA 240 · Auditor's Responsibilities Relating to Fraud · understatement of liabilities is a classic fraud risk
- SA 315 · Identifying and Assessing Risks of Material Misstatement
- SA 330 · Auditor's Responses to Assessed Risks
- SA 500 · Audit Evidence
- SA 505 · External Confirmations
- SA 520 · Analytical Procedures · ageing trends, days payable outstanding
- SA 530 · Audit Sampling
- SA 550 · Related Parties
- SA 570 · Going Concern · significant payable build-up or default may be an indicator
- SA 580 · Written Representations
- Guidance Note on Audit of Liabilities · ICAI AASB
- Technical guidance on MSME disclosure compliance under Section 22 amendments
MSME · the key trap
This is the single most-missed disclosure on Trade Payables. The vendor master rarely keeps pace with Udyam registrations, and Section 22 requires five distinct components, not just the principal outstanding.
What the note must show, every year, for every MSME vendor
Principal amount remaining unpaid to MSME suppliers at year end
Interest paid during the year under Section 16, beyond the appointed day
Interest due and payable for the period of delay, where principal paid beyond appointed day but interest not paid
Interest accrued and remaining unpaid at year end
Further interest remaining due and payable in succeeding years until actually paid
Computed at three times the RBI-notified bank rate (compound interest) from the day after the appointed date, per Section 16. From AY 2024-25, unpaid MSME interest is disallowed under Section 43B(h) unless paid by the due date of filing the return.
Risk areas by assertion
Risks below are mapped to financial statement assertions per SA 315. Completeness is marked as the dominant risk for this area, unlike most asset-side playbooks where existence dominates.
Completeness Dominant
- Goods/services received before year-end, invoice not recorded (GRNI not booked)
- Vendor invoices held back deliberately to defer expense recognition
- Year-end accruals for services (legal, professional, freight) not estimated
- Debit notes raised not matched to vendor credit notes
- Intercompany payables not recorded in full
- Provisions for incurred-but-not-invoiced expenses missing
Existence / Occurrence
- Fictitious vendors created for round-tripping / kickback schemes
- Duplicate vendor masters used to push duplicate payments
- Payables to dormant or ceased-operation entities
Valuation / Accuracy
- Foreign currency payables not restated at closing rate
- Vendor reconciliation differences not investigated
- Discounts/rebates from vendors not adjusted against payables
- MSME delayed-payment interest not computed or accrued
- TDS payable not reconciled with TDS deducted on invoices
Rights & Obligations
- Advances received misclassified as payables
- Disputed liabilities recorded as undisputed, or vice versa
- Related party payables not separately identified
Cut-off High risk
- Invoices dated post year-end for pre-year-end receipts, not accrued
- Invoices dated pre year-end but goods received after, wrongly accrued
- Returns and rejections near year-end not adjusted
Presentation & Disclosure
- MSME vs Non-MSME classification incorrect (Udyam status not updated)
- Ageing schedule wrong buckets, or based on invoice date not due date
- MSMED Section 22 disclosure incomplete
- Disputed vs undisputed split not maintained
- Current vs non-current classification not assessed for extended terms
- Related party payables not separately disclosed
Documents to request
Hand this to the client at the start of the engagement, particularly items 12-13 which are the most commonly missing.
- Trade Payables ledger / subledger, vendor-wise balances at year-end
- Vendor master: PAN, GSTIN, MSME (Udyam) registration number and category, bank details
- Vendor-wise ageing report (system generated)
- GRN register for the year, with GRN date and invoice posting date
- List of unbilled / accrued liabilities (GRNI) at year-end with supporting calculation
- Vendor reconciliation statements for sample vendors, especially related parties
- Vendor confirmation responses (per SA 505)
- Debit notes and credit notes issued/received during the year
- Foreign currency payables listing with year-end exchange rate
- Subsequent period payment register (2-3 months post year-end, for cut-off)
- Subsequent period bills/invoices received register
- MSMED Section 22 working: principal, interest computation, delay days per vendor
- Udyam registration certificates for vendors classified as MSME
- Statutory dues register: GST, TDS, PF, ESI balances and payment dates (CARO 3(vii))
- Disputed liability list with correspondence / litigation status
- Related party master and related party transaction register
- Board approvals for write-back of old/unclaimed payables
- Provision for expenses working with basis of estimation
- GST GSTR-2B reconciliation with purchase register
- GST RCM liability working for applicable supplies
- Bank statements for sample of vendor payments
- Journal voucher listing for manual entries to payables, during the year and post year-end
Fieldwork procedures
Procedures are grouped by assertion. The search for unrecorded liabilities is the headline procedure for this area, run it before anything else.
- Perform search for unrecorded liabilities: select a sample of subsequent-period payments (typically 2-3 months post year-end) and trace back to determine whether the liability relates to the audit period; if so, verify it was accrued
- Select a sample of invoices received in the subsequent period and verify the goods/services relate to pre-year-end and were correctly accrued
- Reconcile GRN register to Trade Payables; verify GRNI is captured as accrued liability
- Test the basis for provisions on recurring expenses (utilities, AMC, professional fees, freight) not yet invoiced
- Trace debit notes raised by the Company to corresponding vendor credit notes; verify timing and completeness
- Compute Days Payable Outstanding (DPO), compare to prior year and industry; investigate significant decline that may indicate understatement
- Verify intercompany payables agree with the counterparty's intercompany receivable balance (group audit coordination)
- Send confirmation requests to a sample of vendors, prioritising high-value, related party, and nil/debit balances; alternative procedures for non-responses
- Verify vendor master details (PAN, GSTIN, bank account) for authenticity for vendors selected for confirmation
- Test for duplicate vendor masters: same PAN/GSTIN/bank account under different vendor codes
- Vouch a sample of payments to bank statements; verify payee matches vendor master
- Recompute foreign currency payables restatement at year-end closing rate; verify exchange gain/loss booked correctly
- Review vendor reconciliations for sample of large balances; investigate reconciling items older than 90 days
- For debit balances in Trade Payables, assess reclassification to loans and advances per Schedule III
- Compute MSMED Section 22 interest liability for each MSME vendor based on delay beyond 45 days (or agreed terms); compare to amount disclosed
- Verify TDS payable reconciles with TDS deducted on vendor invoices booked during the year
- Verify related party payables are identified from the related party master and disclosed separately
- For disputed liabilities, obtain correspondence, legal opinions, litigation status; assess classification for CARO 3(vii)(b)
- Verify customer advances are not netted against or misclassified within Trade Payables
- For a sample of year-end GRNs, verify the invoice was recorded in the correct period
- For a sample of invoices recorded just after year-end, verify the GRN date and determine correct period
- Review goods returns and purchase rejections near year-end for correct period treatment
- Verify vendor master MSME classification is current; cross-check Udyam certificates for sample of MSME and Non-MSME vendors
- Verify Trade Payables ageing schedule buckets computed from correct due dates, separately for MSME and Others
- Verify disputed vs undisputed split in the ageing schedule
- Verify MSMED Section 22 note includes all five required components
- Verify CARO 3(vii)(a) statutory dues schedule, with arrears beyond six months separately identified
- Verify GST Section 16(2)(aa) compliance: GSTR-2B vs purchase register reconciliation, ITC reversed for invoices not in GSTR-2B
- Verify GST 180-day payment rule under Section 16(2); for invoices unpaid beyond 180 days, verify ITC reversal with Rule 37 interest
- Verify RCM liability computed and discharged for applicable transactions
Common findings and red flags
The most common observations encountered in Trade Payables fieldwork. Each line is a working-paper trigger.
Sample conclusion language
Use these as starting drafts. Adapt to engagement-specific facts and your firm's house style. All language is illustrative.
"Based on our procedures, which included confirmation of balances from a sample of vendors, search for unrecorded liabilities through review of subsequent period payments and invoices, reconciliation of GRN to Trade Payables, recomputation of MSMED Section 22 interest, and verification of the Trade Payables ageing schedule per Schedule III, the Trade Payables as at 31 Mar XXXX are complete, accurately stated, and presented in accordance with Schedule III to the Companies Act, 2013 and the MSMED Act, 2006. No material misstatement was noted."
"We noted that the disclosure required under Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006 does not include the interest accrued and remaining unpaid as at the year-end, computed at three times the bank rate notified by the Reserve Bank of India under Section 16 of the said Act. We have recommended that management revise the disclosure to include all components required under Section 22. [Assess materiality for opinion impact.]"
"During our search for unrecorded liabilities, we identified invoices aggregating to Rs. XX lakhs relating to goods/services received prior to 31 Mar XXXX but invoiced and recorded in April/May XXXX. Management has passed an adjustment entry to record this liability and the corresponding expense in the correct period. [State whether adjusted or unadjusted, and materiality assessment.]"
"As reported under CARO 2020 Clause 3(vii)(a), undisputed statutory dues in respect of [GST / TDS / PF, as applicable] aggregating to Rs. XX lakhs were outstanding for a period exceeding six months from the date they became payable, as at 31 Mar XXXX. This is a CARO reporting matter."
"We noted that the Company's vendor master does not consistently capture Udyam registration status, resulting in [N] vendors being classified as Non-MSME despite valid MSME registration. This affects the accuracy of the Trade Payables ageing schedule and MSMED Section 22 disclosure. We have recommended that the Company implement a periodic vendor master review to update MSME classification based on current Udyam registration certificates."
Linked AuditAIKit tools
Three-Way Match
PO/GRN/Invoice reconciliation, duplicate invoice detection, vendor risk scoring, and cut-off testing relevant to GRNI and search for unrecorded liabilities.
Live · SA 530 CompliantAudit Sampling Engine
Select confirmation samples, subsequent-payment samples, and vendor reconciliation review samples.
Live · Section 16(2)GSTR-2B Reconciliation
Purchase register vs GSTR-2B for ITC mismatches, missing invoices, and 180-day payment rule compliance.
Live · Section 40(a)(ia)TDS Verifier
TDS sections, rates, and deductions on vendor invoices vs 26AS, catch short and non-deductions.
PlannedVendor Master Analytics
Duplicate vendors, bank account sharing, dormant reactivation, MSME classification audit.
Sources & references
Every reference in this playbook traces to an official source. Open the link to verify the exact wording in force as at the last review date.
| Reference | Source | Link |
|---|---|---|
| Companies Act, 2013 · Sec 129, 134, Sch III | MCA | mca.gov.in |
| Schedule III amendments · 24 Mar 2021 | MCA notification | mca.gov.in |
| IND AS 1 / 21 / 37 / 109 | ICAI / MCA notification | icai.org |
| Micro, Small and Medium Enterprises Development Act, 2006 | Ministry of MSME | msme.gov.in |
| MSME classification notification · effective 01 Jul 2020 | Ministry of MSME | msme.gov.in |
| CARO 2020 Order · 25 Feb 2020 | MCA | mca.gov.in |
| Income Tax Act · Sec 36(1)(iii), 40(a)(ia), 43B(h) | Income Tax Dept | incometax.gov.in |
| Finance Act 2023 · Section 43B(h) insertion | CBDT | incometax.gov.in |
| CGST Act · Sec 9(3), 9(4), 16(2), 16(2)(aa); Rule 37 | CBIC | cbic.gov.in |
| SA 230, 240, 315, 330, 500, 505, 520, 530, 550, 570, 580 | ICAI AASB | icai.org |
| Guidance Note on Audit of Liabilities | ICAI AASB | icai.org |