2Accounts Payable – Substantive Testing What are accounts payable?Acquisition and payments areBoth the ending liability and the transactions often involve
3Designing Tests of Details of Balances of Accounts Payable Set materiality.Assess Audit Risk and Inherent Risk for A/PAssess Control Risk for Accounts PayableIdentify assertions where substantive testing is insufficient, and/or there is risk of material misstatementDesign and perform test of control. Assess control riskDesign and perform substantive tests. Includes test of details and analytical proceduresThe type of audit procedures?What is the sample size?Items to be selected?Timing – when to do the procedures?
4Tests of Detail of Balance of Accounts Payables ExistenceRecorded acquisitions are for items that were acquiredTrace from the accounts payable listingConfirm accounts payableScan voucher registerExamine underlying documents for authenticity and reasonableness
5Best Company522 Spring Hope DriveSomewhere, OntarioL2T-7Y6January 7, 201YHunter Company322 Vernon RoadElsewhere, OntarioL2R-3W4Our auditors, Sell &Ross LLP, are conducting an audit of out financial statements. For this purpose, please furnish directly to them, at their address noted below, the following information as of December 31, 201X.(1) Itemized statements of our accounts payable to you showing all unpaid items;(2) A complete list of any notes and acceptances payable to you (including any which have been discounted) showing the original date, dates due, original amount, unpaid balances, collateral and endorsers; and(3) An itemized list of your merchandise consigned to us.Your prompt attention to this request will be appreciated. A stamped, addressed envelope is enclosed for your reply.Yours trulyGeorge WintersSell & Ross LLPChartered Accountants841 Main StreetOur Town, Ontario Best CompanyL2S-9J per George Winters
6Completeness To ensure that existing accounts payable Search for unrecorded liabilitiesExamine documents underlying vouchers subsequent to the B/S dateExamine the documents underlying invoices not yet recordedUsing the last receiving report number at the time of the inventory observation
7CutoffTo determine if the transactions are recorded in the correct periodTesting cutoff
8Obligations The client has an obligation to pay Vendors’ statements Confirmations
9Accuracy Acquisitions are recorded for the proper amounts Can use the same procedures as those for existence
10Detail tie-in Accounts payable listing agrees with Footing Tracing the total
11Classification Accounts payable in the listing are properly classified Scanning
12Presentation and disclosure Acquisitions are recorded to result in presentation according to GAAPReview the financial statements
13Analytical Procedures for Accounts Payable Compare acquisition-related expense account balances with prior years.Review list of accounts payable for unusual, non-vendor, and interest bearing payables.Compare individual accounts payable with previous years.Calculate ratios such as purchase divided by accounts payable, and accounts payable divided by current liabilities.
14CHEQUE REGISTER OKRA DEVELOPMENT CORP. 867 Faragut Sales, Inc. 8924 Bailey Road, Salem, OR 92117867Sept. 4, 201XPay to the order ofFaragut Sales, Inc.$474.40Four hundred and seventy 40/DollarsDewey LeeTHE BANKof OREGONTreasurerPage 292CHEQUE REGISTERVoucherVouchersPurchaseCashPayeeCheque No.No.DatePayable Dr.Discounts CrCrFaragut Sales, Inc867Sept. 4, 201X480.009.60470.40
15Tests of Details for Cash Payments Examining documents underlying cash paymentsWhat documents?Existence of the documents provides evidenceApprovals of the documentsA paid chequeRecalculation of the discountAccuracy of posting to the accounts
16Reconciling cash payments per book to cash payments per bank Proof of cashUsually performed when controls over recording cash are weakExcellent evidence of completenessBank reconciliationBank reconciliationsReceiving bank statements directly from the bankBank cutoff statementsBank confirmation
17The Nature of Capital Assets Typically capital assets are used in manufacturingOperational use and normal life of greater than one year
18Tracking Capital Assets Large organizationsThe source of information forSmall organizations may have a manual listing of such assets
19Audit Emphasis for Manufacturing Asset Additions Emphasis is on auditingFor tax purposesAmortization and accumulated amortization
20Categories of Audit Tests for Capital Assets Audit emphasis is the verification of:Current-year acquisitionsCurrent-year disposalsThe ending balance in the asset accountAmortization expenseThe ending balance in accumulated amortizationFor tax purposes
21Analytical Procedures for Capital Assets Compare amortization expense divided by gross manufacturing equipment cost with previous yearsCompare accumulated amortization divided by gross manufacturing equipment cost with previous yearsCompare monthly or annual repairs and maintenance, supplies expense, small tools expense, and similar accounts with previous yearsCompare gross manufacturing cost divided by some measure of production with previous years
22Verification of Asset Balances Relevant internal controls over existing assetsAudit testsAgree last years ending balancesHow about asset additions and disposals?
23Verification of Current Year Acquisitions Important becauseStarting point is normally a continuity schedule prepared by the clientAn important technique is examination of
24Verification of Current Year Disposals The most important internal control over disposals is the existence of a formal method to inform managementThe most important audit procedures areVouch disposal to
25Verification of Amortization Expense and Accumulated Amortization Primary audit objectives involve determining whether the client is:Accumulated AmortizationDebits are normally tested as a part ofCredits are verified as part of
26Audit of Prepaid Expenses Prepaid expenses arise from the concept of matching expenses with revenuesPrepaid insurance is a common expenseLook at the file of insurance policies in force
27Question 16-11, page 529Explain why it is common for auditors to send confirmation requests to vendors with “zero balances” on the client’s accounts payable listing but uncommon to follow the same approach in verifying accounts receivable.
28Problem 16-21, Page 530Because of the small size of the company and the limited number of accounting personnel, Dry Goods Wholesale Company Ltd. initially records all acquisitions of goods and services at the time that cash disbursements are made. At the end of each quarter when financial statements for internal purposes are prepared, accounts payable are recorded by adjusting journal entries. The entries are reversed at the beginning of the subsequent period. Except for the lack of a purchasing system, the controls over acquisitions are excellent for a small company. (There are adequate prenumbered documents for all receipt of goods, proper approvals, and adequate internal verification wherever possible.)Before the auditor arrives for the year-end audit, the bookkeeper prepares adjusting entries to record the accounts payable as of the balance sheet date. The aged trial balance is listed as of the year end, and a manual schedule is prepared adding amounts that were entered in the following month. Thus, the accounts payable balance equals the aged trial balance plus the following month's journal entry for invoices received after year end. All vendors’ invoices supporting the journal entry are retained in a separate file for the auditor’s use.In the current year, the accounts payable balance has increased dramatically because of a severe cash shortage. (The cash shortage apparently arose from expansion of inventory and facilities rather than a lack of sales.) Many accounts have remain unpaid for several months, and the client is getting pressure from several vendors to pay the bills. Since the company had a relatively profitable year, management is anxious to complete the audit as early as possible so that the audited statements can be used to obtain a larger bank. loan.REQUIREDExplain how the lack of a complete aged accounts payable trial balance will affect the auditor’s tests of controls for acquisitions and cash disbursements.What should the auditor use as a sampling unit in performing tests of acquisitions?Assume that no misstatements are discovered in the auditor’s tests of controls for acquisitions and disbursements. How will that assumption affect the verification of accounts payable?Discuss the reasonableness of the client’s request for an early completion of the audit and the implications of the request from the auditor’s point of view.List the audit procedures that should be performed in the year-end audit of accounts payable to meet the cutoff objective.State your opinion as to whether it is possible to conduct an adequate audit in these circumstances.
29Problem 16-22, p. 531You were in the final stages of your examination of the financial statements of Ozine corporation for the year ended December 31, 2011, when the corporation’s president came to talk to you. He believed that there was no point to your examining the 2012 acquisitions data files and testing data in support of 2012 entries. He stated that (1) bills pertaining to 2011 that were received too late to be included in the December acquisitions data files were recorded by the corporation as of the year end by journal entry, (2) the internal auditor made tests after the year end, and (3) he would furnish you with a letter confirming that here were no unrecorded liabilities.REQUIREDShould a public accountant’s test for unrecorded liabilities be affected by the fact that the client made a journal entry to record 2011 bills that were received late? Explain.Should a public accountant’s test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official confirms that, to the best of his or her knowledge, all liabilities have been recorded? Explain.Should a public accountant’s test for unrecorded liabilities be eliminated or reduced because of the internal audit tests? Explain.Assume that the corporation, which handled some government contracts, had no internal auditor but that the Auditor General’s office spent three weeks auditing the records and was just completing her work at this time. How would the public accountant’s unrecorded liability test be affected by the work of the auditor from the Auditor General's office?What sources in addition to the 2011 acquisitions data files should the public accountant consider to locate possible unrecorded liabilities?