Chapter 14: Accounts Payable

verify the cutoff of purchase transactions

establish the proper valuation of AP and the accuracy of purchase

and Other Liabilities transactions

determine that the presentation and disclosure of information about AP

are appropriate
Course ACC5400
auditors are generally concerned with the understatement of liabilities by
Status Done management thus exaggerating the financial strength of the firm

also leads to understatement of expenses and overstatement of NI

Accounts Payable auditors worried more about omission of entries thus making it harder to
detect
Sources and Nature of Accounts Payable
Internal Control over Accounts Payable
AP refers to short obligations arising from the purchase of goods and services
in the course of ordinary business since AP is the flip side of AR and thus it is in the creditors interest to collect

generally not interest bearing constitutes an effective control in the case of AP

generally AP is supported by invoices and statements for suppliers the purchase and receiving cycles should be independent and all forms should
follow serially numbered documentation
accrued liabilities such as salaries, pensions, interest, rent, taxes and
similar expenses must be estimated by management during the year auditors can also audit IT systems as controls of AP and vendor statements
received monthly may also aid in IC
also known as accrued expenses

The Auditorsʼ Objectives in Auditing Accounts Payable

The auditors objectives in the audit of AP are to

use the understand of the client ad its environment to consider inherent

risks, including fraud risks, related to APP

obtain an understanding of IC over AP

assess the romms and design tests of controls and substantive procedures
that

substantiate the existence of AP and clients obligation to pay these

liabilities and establish the occurrence of purchase transactions

establish the completeness of recorded AP

 examples of tests of controls

test controls over the accounting records related to the AP

test controls over processing purchase transactions

if necessary, revise the risks of material misstatement based on the

results of tests of controls

perform further audit procedures - substantive procedures for AP

obtain or prepare a trail balance of AP as of the BS date and reconcile

with the GL

vouch balances payable to selected creditors by inspection of

supporting documents

reconcile liabilities with monthly statements from creditors

confirm AP by direct correspondence with vendor5s

perform analytical procedures or data analytics for AP and related

Audit Documentation for Accounts Payable accounts

the principal WPs are a lead schedule for AP, trial balances of various types of search for unrecorded AP
AP at BS date, confirmation requests for AP perform procedures to identify AP to related parties
auditors may also prepare a listing of unrecorded AP discovered during the evaluate proper balance sheet presentation and disclosure of AP
course of the audit

Audit of Accounts Payable

the following steps indicate the general pattern of work performed by the
auditors in the verification of AP

use the understanding fo the client and its environment to consider

inherent risks, including fraud risks, related to AP

obtain an understanding of internal control over AP

assess the risks of material misstatements and design further audit

procedures

perform further audit procedures - tests of controls

A. Use the understanding of the client and its environment to
consider inherent risks, including fraud risks, related to AP
after they obtain an understanding of the cline and its environment, the
auditors are in a position to identify and assess inherent risk of AP

mainly business risks

if fraud risks identified, auditors will try to understand them and the IC
and if they have been implemented and design their responses to it

B. Obtain an understanding of internal control over AP

use flowcharts, descriptions and questionnaires to understand IC over AP

after this auditors will determine if the controls have been implemented

done through walkthroughs and observations and inspections of C. Assess the risks of material misstatements and design further
various documents audit procedures
auditors will then identify and assess the risks of material misstatement at the
FS and assertion levels

at the FS level, they assess whether identified risks have

pervasive effect on the FS and require an overall response

 effects on individual FS assertions can also be performed in the opposite direction

at the assertion level, auditors identify relevant assertions and design if a sophisticated IT system exists, application controls may be tested
appropriate further audit procedures in response instead

exception reports can be printed

 if necessary, revise the risks of material misstatement based on the results of

tests of controls

auditors use the reassessment of control risk to determine whether it is

necessary to modify their planned substantive procedures

E. Perform further audit procedures - substantive procedures for

AP
 obtain or prepare a trail balance of AP as of the BS date and reconcile with
the GL

D. Perform further audit procedures - tests of controls

 examples of tests of controls

a test controls over the accounting records related to the AP

the validity of the amount in the GL control account for AP may be

established by tracing the postings to the voucher register and cash
the purpose of this procedure is to
disbursement journal
determine that the liability figure appearing in the BS is in agreement
any unusual entries should be investigated
with the individual items comprising the detail record
b test controls over processing purchase transactions
provide a starting point for substantive procedures
the manner in which controls over processing purchase transaction is
auditors will use the list of vouchers to select a representative group of
tested depends on the client system and related controls
items for careful examination
can be tested by vouching specific items back through the
auditors should also verify footings and mathematical accuracy
purchases journal and the cash payments journal to the OG
documents
 vouch balances payable to selected creditors by inspection of supporting
documents

some clients with reconcile vendors statements with detailed records of

payables

allows auditors to limit their review of vendor statements

if not, the auditors must do so themselves

in a situation where there is a risk of inaccurate recording of transactions, if risk is high, auditors may take charge and control mails coming in so that
auditors should consider vouching selected creditors balances to all vendor statements are viewed by them
supporting vouchers, invoices, purchase order and receiving reports
generally, all goods on which title has passed should be included in
year end reports of unpaid vouchers are created as they should inventory, some client under normal accounting procedures record when
represent liabilities the merchandise is received

 reconcile liabilities with monthly statements from creditors auditors should consider if items in transit are substantial enough to
warrant an adjustment

 confirm AP by direct correspondence with vendor5s

  perform analytical procedures or data analytics for AP and related accounts

to gain assurance as to the overall reasonableness of AP, the auditor may

compute ratios such a purchases divided by AP and AP divided by total
current liabilities

confirmations of AP is widely used though it is less necessary than it is for compared to PY for trend analysis
AP analysis of vendor accounts are also done and compared to PY for any
this is because the client usually has externally created documents errors
from the creditors and lenders AP outstanding at YE should also be compared to PY data as well as
it is also because the greatest risk is unrecorded liabilities and purchase discounts
confirmation usually about valuation and existence with less focus on  search for unrecorded AP
completeness

for these reasons, forms sent are blank to ensure all liability from that
vendor is recorded rather than to confirm the amount on the clients books

sent to all vendors used during the year even if their balance is listed
as 0 on the clients books
auditors should be alert for any unrecorded payables

can identified during the steps of recs, confirmations and analytical

procedures

auditors will also focus on entries and AP recorded following the YE

all cash disbursement over a certain threshold in the subsequent if unrecorded liabilities are identified, whether or not the omissions are
period will also be analyzed material enough to warrant an adjusting entry is determined
auditors should consider all potential sources of unrecorded payables items affecting net income are generally adjusted if they pose a large
such as: enough difference
unmatched invoices and un-billed receiving reports cumulative effects of differences should also be considered
voucher payables entered in the voucher register subsequent to the BS  perform procedures to identify AP to related parties
date

invoices received by the client after the BS date

consignments in which the client acts as an consignee

payables to related party require particular attention by the auditors

because they are not the result of trade and opposing interests

poses valuation questions

must be disclosed in the FS

 evaluate proper balance sheet presentation and disclosure of AP verification usually involves tracing amounts to payroll summary sheets,
testing computations of taxes withheld and accrued, determined if they have
been paid according to the law and reviewing quarterly tax returns

also other forms of taxes held

auditors should also review the adequacy of withholding procedures

Sales Taxes Payable

business concerns involved in related sales are required to collect sales taxes
AP to related parties must be listed separately taxes are not an expense to the business but instead they act as an
agent/collector
all debit balances if material should be reclassified

items on consignment should be listed as a liability is the client is the until they are remitted to the government, they represent liabilities for the
consignee company

AP secured by pledged assets should be disclosed in the BS auditors verification includes a review of the clients periodic tax returns

reasonableness of the tax collected is also tested through computations as

well as the accuracy of the amount being charged
Other Liabilities
taxes remitted should be traced to copies of tax returns and vouched to
other than AP, other items classified as current liabilities are
the paid checks
amount withheld from employees pay
Unclaimed Wages
sales taxes payable
subject to misappropriation
unclaimed wages
auditors are concerned over the adequacy of IC over this item
customers deposits
list of unpaid wages should be prepared after each payroll distribution
accrued liabilities
auditors will analyze the unclaimed wages accounts to determine
Amounts Withheld from Employeesʼ Pay the credits represent all unclaimed wages after each payroll distribution
includes payroll deductions such as SS taxes and individual income taxes debits represent only the authorized payments to employees, remittance to
government agencies require that records of amounts earned and withheld the govs or transfers back to general cash funds through approvals
to be adequate to permit a determination of compliance with tax laws
Customersʼ Deposits
Income taxes withheld but not paid serves as a liability to be audited along
with employer payroll taxes many companies require that customers make deposits on returnable
containers
 a review of the procedures followed in accepting and returning deposits for significant estimates, perform a retrospective analysis of the PY
should be made by the auditors with a view to disclosing any shortcomings estimates for evidence of management bias
in IN
Accrued Property Taxes
verification includes obtaining a list of individual deposits and a comparison of
usually few in number and substantial in amount
the total with the GL control account
audit WP should show an analysis of this
accrued interest as well if items are interest bearing
tax payments are verified using bills issued and checks paid
Accrued Liabilities auditors should ensure all property have been covered and any
most accrued liabilities represent obligations payable sometime during the differences be examined
succeedihng period for service or privileges received before the balance
Accrued Payrolls
sheet date
the accuracy of the amount accrued is significant in the determination of
represent estimates made by the client
total liabilities and also in the proper matching os costs and revenue
when dealing with estimates, auditors should
the verification procedure consists of principally comparing the
review and test managements process of developing the estimate amounts accrued to the actual payroll of the sub period and reviewing
the method of allocation at the BS date
review subsequent events or transactions bearing on the estimate
auditors will also search for unrecorded liabilities
independently develop an estimate of the amount to compare to
managements estimate Pension Plan Accruals

the basic auditing steps for accrued liabilities are audit of this begins with the review of the copy of the pension plan in the
auditors permanent file
examine any contracts or other documents on hand that provide the
basis for accrual the client pension liability should be presented in accordance with
FASB
appraise the accuracy of the detailed accounting records maintained
for this category of liability specialists such as an actuary may be employed to confirm the
amounts as well as the trustee
identify and evaluate the reasonableness of the assumption made that
underline the computation of the liability Post employment Benefits Other than Pensions

test the computations made by the client in setting up the accrual auditors will generally employ the help of specialists to verify these
liabilities
determine that the accrued liabilities have been treated consistenly at
the beginning and end of the period Accrued Vacation Pay

consider the need for accrual of other accrued liabilities not presently auditors verification of vacation pay may begin with a review of the
considered permanent file cope of the employment contract or agreement stipulating
the vacation terms
 accuracy and complication with company policies should also be accrued expenses - interest, taxes rent and wages are included in the current
verified liability section of the BS and sometimes combined into one figure

Product Warranty Liabilities income taxes are presented separately

auditors should review the clients annual provisions for estimated future deferred revenues and taxes are listed in the current section if they are to be
expenditure and compute the percentage relationship between the received in the subsequent period
amount in the liability account and the amount of the years sales
Time of Examination
ratio should remain pretty stable year to year
the auditors verification of these rapidly changing liabilities is most effective
debits and credits to this accounts should also be investigated
when performed immediately after the BS date
Accrued Commissions and Bonuses
most of the work is performed after BS date
the essential step for these is reference to the authority for the commission
search for unrecorded liabilities must be made after the BS date within the
or bonus
first few weeks
contracts should be examined and BOD meeting minutes
some current liability accounts such as accrued property taxes can be worked
recalculations may also be performed on in the preliminary stages before the BS date
Income Taxes Payable

auditors should analyze income taxes payable a count and vouch all
amounts to income tax returns, paid checks or other supporting
documents

computation and examination of deferred tax assets or liabilities

especially by tax specialists

auditors should also consider the review of PY tax turned and reports
received back from the IRS

Accrued Professional Fees

by inquiry of officers and by review of corporate minutes, auditors may

learn of professional services received for which no liabilities has yet been
reflected

may also uncover matters needing disclosure in the FS

Balance Sheet Presentation