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 creditReceipt of services such as advertising, repairsInvoices and statements from suppliers usually evidence accounts payableInterest-bearing obligations are not included in accounts payable; they are included as bonds, notes, etc.
3 Sources of Accrued Liabilities Sometimes called accrued expensesExamples: Salaries, interest, rentAccumulate 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 transactionsEstablish the completeness of recorded accounts payableVerify the cutoff of transactions affecting accounts payableEstablish the proper valuation of accounts payable and the accuracy of purchase transactionsDetermine that the presentation and disclosure of accounts payable are appropriate555
5 Primary concernPossibility of understatement or omission of liabilitiesExaggerates the financial strength of companyConceals fraud as effectively as overstatement of assetsAccompanied by understatement of expenses and overstatement of net income
6 Controls Over the Acquisition Cycle Segregation of duties--purchases and disbursementsApproval of purchase ordersNumerical control of purchase orders and receiving reportsMatching of details of vendors’ invoices to purchase orders and receiving documentsApproval of vendors’ invoicesPre-numbered checksReconciliation of details of individual disbursements to controlling accountsReconciliation of vendors’ statements to accountsReconciliation of bank accountsUse of budgets and analysis of variancesUse of chart of accounts and review of account coding222
9 Audit Documentation Working papers Lead schedule for accounts payable Trial balances of various types of accounts payableConfirmation requests for accounts payableListing of unrecorded accounts payable
11 Risks of Material Misstatement Controls against misstatementsAuditors found serially numbered receiving reports are preparedSerially numbered vouchers are preparedPayments made promptly on due datesImmediately recorded in accounting recordsIndependent employee reconciles subledger to general ledger
12 Risks of Material Misstatement Risks of misstatementsSubsidiary records not in agreement with general ledgerReceiving reports and vouchers used haphazardlyPurchase transactions often not recorded until payment is madeMany accounts payable long past dueRisks 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 Payable 666
18 Contrasting Confirmation of Accounts Payable and Accounts Receivable Accounts Payable Accounts ReceivablePrimary Audit Completeness ExistenceObjectiveOther Evidence External evidence Internal evidenceAvailable held by client (i.e.., (i.e., sales invoices,vendors’ invoices receiving reports) and statements)ConfirmationGenerally No YesRequired?777
19 Search for Unrecorded A/P Be alert during reconciliations, confirmations and analytical procedures for unrecorded liabilitiesExamine transactions recorded following year-endCompare cash payments after year-end to a/p trial balanceExamine cash disbursements over specific dollar amounts during subsequent period
20 Potential Sources of Unrecorded A/P Unmatched invoices and unbilled receiving reportsVouchers payable entered in the voucher register subsequent to balance sheet dateInvoices received after balance sheet dateConsignments in which client acts as a consignee
22 Adjusting entry needed? Misstatements and omissions are judged based on impact on the financial statementsMaterialityEffect on net incomeNeed 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 dateTrace amounts withheld to payroll summary sheetsTest computations of taxes withheld and accruedDetermine that taxes have been deposited in accordance with law
24 Sales Tax PayableRequired to collect sales tax imposed by state and local governmentsNot an expense, just collecting agentLiabilities until remittedVerify liability by reviewing tax returnTest reasonableness of amountTest invoices for correct tax charge
25 Unclaimed wages Subject to misappropriation Concerned with adequacy of internal controlShould not be left for more than a few dayPrompt deposit in special bank accountAnalyze unclaimed wages to determineCredit represents all unclaimed wages after each payroll distributionDebits represent authorized payments
26 Customers’ DepositsDeposits on returnable containers or to guarantee payment of billsReview procedures followed in accepting and returning depositsVerify list of individual deposits and compare to general ledger accountGenerally do not confirm
27 Accrued Liabilities (1 of 3) Obligations payable sometime during the succeeding period for services or privileges received before balance sheet dateExamples: Interest payable, accrued property taxesAccounting estimatesReview and test management’s process of developing the estimateReview subsequent eventsIndependently develop estimate to compare
28 Accrued Liabilities (2 of 3) Basic audit steps1. 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 TaxesAccrued PayrollsPension Plan AccrualsPostemployment Benefits other than PensionsAccrued Vacation PayProduct Warranty LiabilitiesAccrued Commission and BonusesIncome Tax PayableAccrued Professional Fees
30 Presentation Current liability Long-term liability Accrued expenses Deferred income tax for next yearDeferred credits for rentDeposits on contractsLong-term liabilityDeferred income tax - noncurrent
31 Time of ExaminationMost effective when performed immediately after the balance sheet dateLittle value if done before because concern with understatementsSome can be done at interim:Accrued property taxesAmounts withheld from employees’ pay