2. Sources of Accounts Payable
Short-term obligations arising from purchase of goods and services in ordinary course of business; examples:
Acquisition of merchandise on credit
Receipt of services such as advertising, repairs
Invoices and statements from suppliers usually evidence accounts payable
Interest-bearing obligations are not included in accounts payable; they are included as bonds, notes, etc.

3. Sources of Accrued Liabilities
Sometimes called accrued expenses
Examples: Salaries, interest, rent
Accumulate over time and management must make accounting estimate at year-end.
Note that if management does not make such an estimate, no entry will occur since the related transactions (e.g., interest) may have occurred months ago

4. Objectives for the Audit Accounts Payable and Purchases
Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to accounts payable.
Obtain an understanding of internal control over accounts payable.
Assess the risks of material misstatement and design tests of controls and substantive procedures that:
Substantiate the existence of accounts payable and the client’s obligation to pay these liabilities and establish the occurrence of purchase transactions
Establish the completeness of recorded accounts payable
Verify the cutoff of transactions affecting accounts payable
Establish the proper valuation of accounts payable and the accuracy of purchase transactions
Determine that the presentation and disclosure of accounts payable are appropriate 5 5 5

5. Primary concern
Possibility of understatement or omission of liabilities
Exaggerates the financial strength of company
Conceals fraud as effectively as overstatement of assets
Accompanied by understatement of expenses and overstatement of net income

6. Controls Over the Acquisition Cycle
Segregation of duties--purchases and disbursements
Approval of purchase orders
Numerical control of purchase orders and receiving reports
Matching of details of vendors’ invoices to purchase orders and receiving documents
Approval of vendors’ invoices
Pre-numbered checks
Reconciliation of details of individual disbursements to controlling accounts
Reconciliation of vendors’ statements to accounts
Reconciliation of bank accounts
Use of budgets and analysis of variances
Use of chart of accounts and review of account coding 2 2 2

7. Acquisition Cycle--Documents
Purchase order
Receiving report
Vendor’s invoice
Vendor’s statement 3 3 3

9. Audit Documentation Working papers Lead schedule for accounts payable
Trial balances of various types of accounts payable
Confirmation requests for accounts payable
Listing of unrecorded accounts payable

11. Risks of Material Misstatement
Controls against misstatements
Auditors found serially numbered receiving reports are prepared
Serially numbered vouchers are prepared
Payments made promptly on due dates
Immediately recorded in accounting records
Independent employee reconciles subledger to general ledger

12. Risks of Material Misstatement
Risks of misstatements
Subsidiary records not in agreement with general ledger
Receiving reports and vouchers used haphazardly
Purchase transactions often not recorded until payment is made
Many accounts payable long past due
Risks such as these indicate the need for extensive substantive procedures

13. Accounts Payable Audit Steps (1 of 4)
A. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to accounts payable. B. Obtain an understanding of internal control over accounts payable. C. Assess the risks of material misstatement and design further audit procedures.

14. Accounts Payable Audit Steps (2 of 4)
D. Perform further audit procedures—tests of controls.
1. Examples of tests of controls.
a. Verify a sample of postings to the accounts payable control account.
b. Vouch to supporting documents a sample of postings in selected accounts of the accounts payable subsidiary ledger.
c. Test IT application controls.
2. If necessary, revise the risks of material misstatement based on the results of tests of controls.

15. Accounts Payable Audit Steps (3 of 4)
E. Perform further audit procedures—substantive procedures for accounts payable. 1. Obtain or prepare a trial balance of accounts payable as of the balance sheet date and reconcile with the general ledger. 2. Vouch balances payable to selected creditors by inspection of supporting documents. 3. Reconcile liabilities with monthly statements from creditors. 4. Confirm accounts payable by direct correspondence with vendors.

16. Accounts Payable Audit Steps (4 of 4)
E. Substantive procedures (continued)
5.Perform analytical procedures for accounts payable and related accounts.
6. Search for unrecorded accounts payable.
7. Perform procedures to identify accounts payable to related parties.
8. Evaluate proper balance sheet presentation and disclosure of accounts payable.

17. Summary of Substantive Tests of Accounts Payable6 6 6

18. Contrasting Confirmation of Accounts Payable and Accounts Receivable
Accounts Payable Accounts Receivable
Primary Audit Completeness Existence
Objective
Other Evidence External evidence Internal evidence
Available held by client (i.e.., (i.e., sales invoices,
vendors’ invoices receiving reports) and statements)
Confirmation
Generally No Yes
Required? 7 7 7

19. Search for Unrecorded A/P
Be alert during reconciliations, confirmations and analytical procedures for unrecorded liabilities
Examine transactions recorded following year-end
Compare cash payments after year-end to a/p trial balance
Examine cash disbursements over specific dollar amounts during subsequent period

20. Potential Sources of Unrecorded A/P
Unmatched invoices and unbilled receiving reports
Vouchers payable entered in the voucher register subsequent to balance sheet date
Invoices received after balance sheet date
Consignments in which client acts as a consignee

22. Adjusting entry needed?
Misstatements and omissions are judged based on impact on the financial statements
Materiality
Effect on net income
Need to consider cumulative effect on the financial statements

23. Amounts withheld from employees’ pay
Income taxes withheld from employees’ pay but not remitted as of balance sheet date
Trace amounts withheld to payroll summary sheets
Test computations of taxes withheld and accrued
Determine that taxes have been deposited in accordance with law

24. Sales Tax Payable
Required to collect sales tax imposed by state and local governments
Not an expense, just collecting agent
Liabilities until remitted
Verify liability by reviewing tax return
Test reasonableness of amount
Test invoices for correct tax charge

25. Unclaimed wages Subject to misappropriation
Concerned with adequacy of internal control
Should not be left for more than a few day
Prompt deposit in special bank account
Analyze unclaimed wages to determine
Credit represents all unclaimed wages after each payroll distribution
Debits represent authorized payments

26. Customers’ Deposits
Deposits on returnable containers or to guarantee payment of bills
Review procedures followed in accepting and returning deposits
Verify list of individual deposits and compare to general ledger account
Generally do not confirm

27. Accrued Liabilities (1 of 3)
Obligations payable sometime during the succeeding period for services or privileges received before balance sheet date
Examples: Interest payable, accrued property taxes
Accounting estimates
Review and test management’s process of developing the estimate
Review subsequent events
Independently develop estimate to compare

28. Accrued Liabilities (2 of 3)
Basic audit steps
1. Examine any contracts or other documents on hand that provide the basis for the accrual.
2. Appraise the accuracy of the detailed accounting records maintained for this category of liability.
3. Identify and evaluate the reasonableness of the assumptions made that underlie the computation of the liability.
4. Test the computations made by the client in setting up the accrual.
5. Determine that accrued liabilities have been treated consistently at the beginning and end of the period.
6. Consider the need for accrual of other accrued liabilities not presently considered (that is, test completeness).
7. For significant estimates, perform a retrospective analysis of the prior year’s estimates for evidence of management bias.

29. Accrued Liabilities (3 of 3)
Accrued Property Taxes
Accrued Payrolls
Pension Plan Accruals
Postemployment Benefits other than Pensions
Accrued Vacation Pay
Product Warranty Liabilities
Accrued Commission and Bonuses
Income Tax Payable
Accrued Professional Fees

30. Presentation Current liability Long-term liability Accrued expenses
Deferred income tax for next year
Deferred credits for rent
Deposits on contracts
Long-term liability
Deferred income tax - noncurrent

31. Time of Examination
Most effective when performed immediately after the balance sheet date
Little value if done before because concern with understatements
Some can be done at interim:
Accrued property taxes
Amounts withheld from employees’ pay