Ch 14 Flashcards
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, etc.
Invoices and statements from suppliers usually evidence of the amount of accounts payable.
Interest-bearing obligations are not included in accounts payable; they are included as bonds, notes, etc.
Sources of Accrued Liabilities
Accrued liabilities:
Sometimes called accrued expenses.
Examples: Salaries, interest, and 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 (for example, interest) may have occurred months ago.
3 audit steps
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:
Assess the risks of material misstatement and design tests of controls and substantive procedures that:
a. Substantiate the existence of accounts payable and the client’s obligation to pay these liabilities and establish the occurrence of purchase transactions.
b. Establish the completeness of recorded accounts payable.
c. Verify the cutoff of transactions affecting accounts payable.
d. Establish the proper valuation of accounts payable and the accuracy of purchase transactions.
e. Determine that the presentation and disclosure of accounts payable are appropriate.
Primary Concern in Audit of Liabilities
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.
Failing to make an entry (record a transaction or adjustment) can overstate income and understate liabilities
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.
Indications of Risks of Misstatement
Subsidiary records not in agreement with general ledger.
Receiving reports and vouchers used haphazardly.
Purchase transactions not recorded until payment is made.
Many accounts payable long past due.
Risks such as these indicate the need for additional substantive procedures.
Additional Tests of Controls: D. Perform further audit procedures—tests of controls.
a. Test controls over the accounting records related to the accounts payable.
b. Test controls over processing purchase transactions.
If necessary, revise the risks of material misstatement based on the results of tests of controls.
Note– if client compares all vendor statements with its records, this is a STRONG
Control—hopefully client maintains these reconciliations for proof of performance
E. Perform further audit procedures—substantive procedures for accounts payable.
Obtain or prepare a trial balance of accounts payable as of the balance sheet date and reconcile with the general ledger.
Vouch balances payable to selected creditors by inspection of supporting documents. (invoices, purchase orders, receiving reports, etc.)
Reconcile liabilities with monthly statements from creditors.
Confirm accounts payable by direct correspondence with vendors. ( this step may actually be #2)
Perform analytical procedures for accounts payable and related accounts. (e.g. ratio of cash discounts to purchases)(ratio of purchases to A/P)
Search for unrecorded accounts payable.
Perform procedures to identify accounts payable to related parties.
Evaluate proper balance sheet presentation and disclosure of accounts payable.
Obtain trial balance of payables and reconcile with the ledgers.
Valuation and accuracy
Vouch balances payable to selected creditors by inspecting supporting documents.
Existence, occurrence, andobligations
Valuation and accuracy
Cutoff
Reconcile liabilities with creditor’s monthly statements.
Confirm accounts payable.
Perform analytical procedures or data analytics.
Completeness
Existence, occurrence, andobligations
Valuation and accuracy
Cutoff
Search for unrecorded accounts payable.
Completeness
Cutoff
Perform procedures to identify accounts payable to related parties.
Evaluate financial statement presentation and disclosure.
Presentation and disclosure
