PURCHASE TO PAY PROCESS (P2P) ● Examine cancelled check for proper

authorization or signature

AUDIT PROCEDURES ● Existing cash disbursements are

●
●
Examine supporting documents for
Reconcile recorded cash disbursements
recorded w/ the cash disbursements on bank
1. Substantive Tests of Transactions over Purchases statement

AUDIT OBJECTIVE TYPICAL AUDIT PROCEDURES ● Recorded cash disbursements are ● Compare cancelled checks/EFT w/ the
accurate PJ and cash disbursements journal
● Recorded acquisitions are for goods and ● Review Purchases Journal, General entries
services received Ledger, and A/P master file for large or ● Recalculate cash discounts
unusual amounts ● Reconcile recorded cash disbursements
● Examine underlying documents for w/ the cash disbursements on bank
statement
reasonableness
● Cash Disbursements transactions are ● Test mathematical accuracy by footing
● Existing acquisitions are recorded ● Trace from a file of receiving report to correctly included in the A/P subsidiary the journals and tracing postings to GL,
record and are correctly summarized A/P subsidiary records
PJ
● Cash Disbursements are correctly ● Compare classification w/ chart of
● Trace from a file of VI and trace to PJ classified accounts
● Search for unrecorded liabilities ● Cash Disbursements are recorded on ● Compare dates on cancelled checks/
correct dates Electronics file transfer (EFT) with the
● Recorded acquisitions are accurate ● Recalculate mathematical accuracy of Cash Disbursements Journal
VI including discounts and freight ● Disbursements are properly aggregated ● Read contracts/terms & agreements
and disclosed in the Financial with supplier
● Acquisitions are correctly included in the ● Test mathematical accuracy by footing Statements ● Discuss with the client management
A/P and Inventory subsidiary records the journals and tracing postings to GL,
A/P, and Inventory subsidiary records
1. Substantive Analytical Procedures for A/P
● Acquisitions are correctly classified ● Compare classification w/ chart of accts
SUBSTANTIVE ANALYTICAL POSSIBLE MISSTATEMENT
● Acquisitions are recorded on correct ● Compare dates of RR and VI with PJ PROCEDURE
dates ● Compare acquisition-related expense ● Misstatement of A/P and Expenses
account balances with prior periods
● Acquisitions are properly aggregated ● Read contracts/terms & agreements ● Review list of A/P for unusual, ● Classification misstatement for
and disclosed with supplier non-operating, and interest bearing non-trade liabilities
● Discuss with the client management payables
● Compare individual A/P with previous ● Unrecorded or non-existent accounts or
years misstatements
● Calculate ratios ● Misstatement in A/P and related
2. Substantive Tests of Transactions over Cash Disbursements expenses

AUDIT OBJECTIVE TYPICAL AUDIT PROCEDURES

2. Design TODs of A/P and related disclosures
● Recorded cash disbursements are for ● Review Cash Disbursements Journal,
goods and services received General Ledger, and A/P master file for AUDIT OBJECTIVE TYPICAL AUDIT PROCEDURES
large or unusual amounts
● Trace the cancelled check to related ● A/P in A/P List agree with related master ● Verify mathematical accuracy of the A/P
purchase entry and examine payee file (aka subsidiary record), and the total subsidiary record (or ledger)
name and amount is correctly added and agrees w/ the GL ● Trace the total of SL against the GL
 ● Trace individual vendor’s invoices to
subsidiary record for names and
amounts
● A/P in the A/P List liabilities ● Trace from A/P List to vendor’s invoices
and statements
● Confirm A/P with the supplier,
emphasizing large and unusual amounts
● Existing A/P are included in the A/P List ● Perform search for unrecorded A/P
● A/P in the A/P List are accurate ● Perform same procedures as those
used for existence objective & search
for unrecorded A/P
● Transactions in the acquisition and ● Perform search for unrecorded liabilities
payment cycle are recorded in the ● Perform purchase cut-off test
proper period ● Perform tracing

● Perform detailed tests as part of

physical observation of inventory
● Test for inventory in transit
● A/P in the A/P List are correctly ● Review the list of subsidiary record for
classified related parties, notes, or other
interest-bearing liabilities, long-term
payables, and debit balances

● The company has an obligation to pay ● Examine suppliers’ statements,

the liabilities included in the A/P invoices, and confirm A/P

● A/P are properly presented and ● Determine whether related parties,

disclosed notes, or other interest-bearing
liabilities, long-term payables, and debit
balances (if material) are appropriately
presented and disclosed
 PURCHASE TO PAY PROCESS (P2P) - Examine the reasonableness
of Purchases recorded in the

AUDIT PROCEDURES ● Existing acquisitions are recorded ●

PJ
Trace from a file of receiving report to
PJ
Designing Tests of Controls and Substantive Tests of Transaction The usual emphasis of the audit of ● Trace from a file of VI and trace to PJ
3. Understand Internal Controls Purchasing cycle is on completeness rather ● Search for unrecorded liabilities
- Study the flowchart, discuss the process w/ owners, and trace the transaction than occurence because of it’s tendency to
by walkthrough understate liabilities
● Recorded acquisitions are accurate ● Recalculate mathematical accuracy of
4. Assess planned Control Risk – check whether there are:
VI including discounts and freight
● Authorization of purchases
- For accuracy, recalculate VI, or
- Check whether the client has procedures to determine the proper authorization
amounts in Ledger (Sub &
of each purchases
Gen)
● Separation of asset custody from other functions
● Acquisitions are correctly included in the ● Test mathematical accuracy by footing
- Ex. Segregation of duties of purchasing dept, receiving dept, A/P Dept, and
A/P and Inventory subsidiary records the journals and tracing postings to GL,
Treasury
A/P, and Inventory subsidiary records
● Timely recording and independent review of transactions
Part of test of posting and summarization - Test mathematical accuracy of
● Authorization of payments
which is under the accuracy assertion of the the PL or Purchase Transaction
- Signing of checks or approval of electronic transfers by an indiv w/ proper
client File and agree it or trace it to
authority
GL whether the purchase
- Separation of responsibilities for signing checks, & making transfers, &
entries are posted
performing the A/P function
appropriately to the related
- Careful examination of supporting documents by the person who signs the
ledgers
checks or authorizes electronic payments
● Acquisitions are correctly classified ● Compare classification w/ chart of accts
5. Determine extent of Test of Controls - Compare accounts in PJ w/ CA
● Acquisitions are recorded on correct ● Compare dates of RR and VI with PJ
6. Design Test of Controls for Purchasing Cycle dates
Typical TOCs: ● Acquisitions are properly aggregated ● Read contracts/terms & agreements
● Examine docus in voucher package – for completeness (PR, PO, RR, VI, V) and disclosed with supplier
● Examine indications of approval – there should be approval of dept head or - Whether correct info related to
supervisor. And where necessary for larger amount, approval of president purchases are disclosed
● Attempt to input transactions w/ valid & invalid vendors – by inputting the ● Discuss with the client management
name of the vendor in the client’s system to verify the accreditation of vendor - about the required disclosures
● Examine indication of cancellation of supporting documents upon payment
● Account for a sequence of documents (PO, RR, V)
8. Design Substantive Tests of Transactions over Cash Disbursements
7. Design Substantive Tests of Transactions over Purchases
AUDIT OBJECTIVE TYPICAL AUDIT PROCEDURES
AUDIT OBJECTIVE TYPICAL AUDIT PROCEDURES ● Recorded cash disbursements are for ● Review Cash Disbursements Journal,
● Recorded acquisitions are for goods and ● Review Purchases Journal, General goods and services received General Ledger, and A/P master file for
services received Ledger, and A/P master file for large or large or unusual amounts
unusual amounts ● Trace the cancelled check to related
- Review PJ. From PJ, we can purchase entry and examine payee
vouch the supporting docus name and amount
(PO, RR, VI) from the entries ● Examine cancelled check for proper
made in PJ authorization or signature
● Examine underlying documents for ● Examine supporting documents for
reasonableness
 ● Existing cash disbursements are ● Reconcile recorded cash disb w/ the
recorded cash disbursements on bank statement SUBSTANTIVE ANALYTICAL POSSIBLE MISSTATEMENT
● Recorded cash disbursements are ● Compare cancelled checks/EFT w/ the PROCEDURE
accurate PJ and cash disb journal entries ● Compare acquisition-related expense ● Misstatement of A/P and Expenses
● Recalculate cash discounts account balances with prior periods
● Reconcile recorded cash disb w/ the
cash disbursements on bank statement Ex. Comparing purchases of inv/mats in the Then we can see possible MS in A/P and
● Cash Disbursements transactions are ● Test mathematical accuracy by footing current year vs last yr related expense acccount, especially if there
correctly included in the A/P subsidiary the journals and tracing postings to GL, are significant differences or unusual RS
record and are correctly summarized A/P subsidiary records considering there are no changes in the
● Cash Disbursements are correctly ● Compare classification w/ chart of accts fundamental operations of the entity
classified ● Review list of A/P for unusual, ● Classification misstatement for
● Cash Disbursements are recorded on ● Compare dates on cancelled checks/ non-operating, and interest bearing non-trade liabilities
correct dates (cut-off) EFT with the CDJ payables
● Disbursements are properly aggregated ● Review contracts/terms & agreements Then if there are non-trade liabilities, they
and disclosed in the Financial with supplier Ex. The client included non-interest bearing must be presented separately
Statements ● Discuss with the client management liabilities as part of A/P, which is wrong, since
what should be recorded in A/P are
purchases only made under the normal
9. Test of Details of Balances for Accounts Payable course of business
3. Identify significant risks and assess ROMM for A/P ● Compare individual A/P with previous ● Unrecorded or non-existent accounts or
● A/P can be impacted by a large number of transactions and is often made up years misstatements
of many vendor balances - For n)
● Auditors typically assess inherent risk as medium or high for A/P due to its ● Calculate ratios ● Misstatement in A/P and related
significant balance and potential for understatements expenses
● Recent changes in the cycle due to use of technology and e-commerce, can Ex. The percentage of each expense line
create significant business risks item toward total expense of the current year
and prior year or against companies in the
4. Set Performance Materiality for A/P same industry

5. Assess Control Risk for acquisition and payment cycle Ex. Inventory turnover. To determine whether
● Auditors assess CR for A/P after setting performance materiality and COGS and purchases are (reasonable?)
assessing ROMM
● The effectiveness of ICs over p2p cycle can impact the auditor’s STs over A/P
● Effective ICs, such as pre-numbered vouchers and automatic reconciliation, 8. Design TODs of A/P and related disclosures
can reduce the need for extensive audit efforts to verify A/P
● While inadequate ICs, such as lack of RRs and delayed payment of bills, can AUDIT OBJECTIVE TYPICAL AUDIT PROCEDURES
increase the likelihood of understatement in A/P and require extensive testing
● A/P in A/P List agree with related master ● Verify mathematical accuracy of the A/P
to verify accuracy
file (aka subsidiary record), and the total subsidiary record (or ledger)
● Monthly reconciliation of vendor statements and A/P master file w/ the GL
is correctly added and agrees w/ the GL - Review PJ.
should be performed.
● Trace the total of SL against the GL
● After assessing CR, auditor design and performs TOCs and STs of
● Trace individual vendor’s invoices to
Transactions for acquisitions and cash disbursements
subsidiary record for names and
amounts
6. Design and Perform TOCs and STs of Transacts for acquisition and payment
● A/P in the A/P List liabilities ● Trace from A/P List to vendor’s invoices
and statements
- We can vouch from A/P List to
Vendor’s invoices & statements
7. Design and Perform Substantive Analytical Procedures for A/P
 ● Confirm A/P with the supplier, liabilities, long-term payables, and debit
emphasizing large and unusual amounts balances (if material) are appropriately
- Often not necessary, because presented and disclosed
suppliers usually sends - Whether correct info related to
supplier statements periodically purchases are disclosed
- Problem is—statements are
often acquired from the client
because suppliers sends it to 9. Test of Details for Accounts Payable
them, hence reliability is o Auditing liabilities focuses on detecting understated or omitted liabilities to avoid
diminished legal liability
- That is why, if the auditor
believes there is a need for o Auditors should also design tests to detect material understatement of earnings
confirmation, he must ask the and owner’s equity, including those arising from material overstatements of A/P
supplier to send them a copy - But overstatement of liabilities is possible also. Because its corresponding
● Existing A/P are included in the A/P List ● Perform search for unrecorded A/P expenses will be recorded higher, the earnings will be understated. This is
- Highlight of audit of liab possibly done to evade taxes
● A/P in the A/P List are accurate ● Perform same procedures as those - Hence, the tests to be performed must be both for completeness,
used for existence objective & search occurence and existence
for unrecorded A/P
- Ex. Vouching; o The balance-related audit objectives for verifying liabilities are similar to those of
- Ex. Recalculate the VI receivables, with minor modifications
- Recalculate/ verify the
mathematical accuracy of the o Realizable value and rights aspects are not applicable to liabilities, and the focus is
ledgers on detecting understatements. Auditor tests the obligations aspect instead of rights
● Transactions in the acquisition and ● Perform search for unrecorded liabilities
payment cycle are recorded in the ● Perform purchase cut-off test o The auditor’s procedures depend on the nature of the entity, materiality of A/P,
proper period - To determine whether effectiveness of ICs, and inherent risk
purchases are recorded in the
correct accounting period
● Perform tracing Primary Audit Procedure: Search for Unrecorded Liabilities
- From source docu to acctng o Examine underlying documentation for subsequent cash disbursements
rec - Ex. The client has a policy regarding paying the suppliers w/in 30 days from the
● Perform detailed tests as part of date of invoice.
physical observation of inventory - But the auditor saw, that on 1st week of january, they made a payment for merch.
● Test for inventory in transit - This means that the purchase happened on the prior year.
● A/P in the A/P List are correctly ● Review the list of subsidiary record for - Hence, the auditor should conclude that it is part of the liabilities as of December
classified related parties, notes, or other 31.
interest-bearing liabilities, long-term - Therefore, that purchase must be traced if it is recorded as part of the liability in the
payables, and debit balances FS of the client as of December 331.
- Review A/P List or A/P SL for - And if it turned out that it is not part of the liabilities as of December 31, it will be a
unusual items. Non-trade or case of unrecorded liability, making liabilities be understated
interest-bearing liabilities must
be excluded from A/P o Examine underlying documentation for invoices not paid several weeks after
● The company has an obligation to pay ● Examine suppliers’ statements, year-end
the liabilities included in the A/P invoices, and confirm A/P - However, not all invoices are paid weeks after year-end, hence this procedure.
- For terms & conditions to - Ex. The client receive billing statement from electric utilities (e.g. MERALCO) or
establish the obligation of client communication companies (e.g. PLDT).
● A/P are properly presented and ● Determine whether related parties, - In that case, billings received few weeks after year-end pertains to utilities incurred
disclosed notes, or other interest-bearing from previous month.
 - Hence, even it is not yet paid, it must also be traced back to their accruals as of
December 31.
- So, if those expenditures already incurred in the last period, but not yet recorded
by the entity as of December 31, it is a case of unrecorded liabilities, which also
understates liabilities.

o Trace RRs issued before year-end to related invoices

o If the invoice is received after the RR, and that it is beyond December 31, there is a
possibility that the purchase was recorded late also, which makes it a case of
unrecorded liabilities, which understates the liability.

o Trace statements from suppliers that show a balance due to the A/P trial
balance
o Another procedure: use of supplier’s statement which shows the entity’s due
balance as of year-end. If it shows variances, it is a possible unrecorded liabilities

o Send confirmations to suppliers with which the client does business

- In search for unrecorded liabilities often times, auditors perform zero confirmation
- Zero confirmation – auditors identify suppliers with which the client does business
regularly. From time to time, supplier delivers goods to the entity, and yet, when
auditors look at the balance of A/P Subsidiary Ledger as of year-end, shows that
the supplier has a zero balance, despite regular transactions with each other.
Hence, auditors send letter to the supplier to confirm if the entity has no payable to
them as of year-end. And if it turns out that they have due balance, it is a case of
unrecorded liabilities.

o Cutoff Tests
- GR: once goods are received, liability is recognized
- Relationship of cutoff to physical observation of inventory
- Inventory in transit (include purchase in transit shipped FOB SP)

Reliability Of Evidence
o Supplier’s Invoices
- Supplier sends it every time a client has a transaction with a supplier

o Supplier’s Statement
- At the end of each period, monthly or yearly, a supplier will send a statement of
account summarizing transactions of suppliers with our client during that period
- Includes opening balance of liab, purchases during the period, and payment of
client to the supplier, and the ending bal.
- Recipient: Client

o Confirmation of AP
- Practically, supplier’s statement and confirmation of AP are similar. The only
difference is the recipient.
- Recipient: Auditor directly