A prepayment is the settlement of a debt or installment payment before its official due date. A prepayment can either be made for the entire balance of a liability or for an upcoming payment that is paid in advance of the date for which the borrower is contractually obligated to pay.
The following are substantive procedures for auditing prepayments:
Obtain schedule of all prepayments. cast list to ensure mathematical accuracy and agree balance with financial statements.
Nature and amount of all prepayments should be compared with prior periods.
For sample of prepayments, recalculate their amounts with supporting documents and payment from bank statement.
Agree prepayments to the adjustments after the end of the year