auditing the acquisition process

8/9/2019 Auditing the Acquisition Process

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AccountsPayable andOther Liabilities

Chapter 14

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc !ll rightsreser"e#


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14-2

Sources of Accounts Payable Short-term obligations arising from purchase of

goods and services in ordinary course of

business; examples: Acuisition of merchandise on credit

!eceipt of services such as advertising" repairs #nvoices and statements from suppliers usually

evidence accounts payable

#nterest-bearing obligations are not included in

accounts payable; they are included as bonds"notes" etc$


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Sources of Accrued &iabilities

Accrued liabilities Sometimes called accrued expenses 'xamples: Salaries" interest" rent Accumulate over time and management must

ma(e accounting estimate at year-end$• )ote that if management does not ma(e such an

estimate" no entry *ill occur since the relatedtransactions +e$g$" interest, may have occurred

months ago


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b.ectives for the Audit Accounts

Payable and Purchases

1$ /se the understanding of the client and its environment toconsider inherent risk " including fraud ris(s" related toaccounts payable$

2$ btain an understanding of internal control over accountspayable$

%$ Assess the ris(s of material misstatement and design tests ofcontrols and substantive procedures that:

a$ Substantiate the existence of accounts payable and the client0sobligation to pay these liabilities and establish the occurrence ofpurchase transactions

b$ 'stablish the completeness

of recorded accounts payablec$ erify the cutoff of transactions affecting accounts payabled$ 'stablish the proper valuation of accounts payable and the

accuracy of purchase transactionse$ etermine that the presentation and disclosure of accounts

payable are appropriate


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Primary concern

Possibility of understatement or omission

of liabilities 'xaggerates the financial strength of

company onceals fraud as effectively as

overstatement of assets

Accompanied by understatement of expensesand overstatement of net income


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14-5

Controls Over the

Acquisition Cycle

Segregation of duties--purchases and disbursements Approval of purchase orders )umerical control of purchase orders and receiving reports 6atching of details of vendors0 invoices to purchase orders and

receiving documents Approval of vendors0 invoices Pre-numbered chec(s !econciliation of details of individual disbursements to

controlling accounts

!econciliation of vendors0 statements to accounts !econciliation of ban( accounts /se of budgets and analysis of variances /se of chart of accounts and revie* of account coding


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Acuisition ycle--ocuments

Purchase order

!eceiving report

endor0s invoice

endor0s statement


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Audit ocumentation

or(ing papers &ead schedule for accounts payable rial balances of various types of accounts

payable onfirmation reuests for accounts payable &isting of unrecorded accounts payable


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!is(s of 6aterial 6isstatement

ontrols against misstatements Auditors found serially numbered receiving

reports are prepared Serially numbered vouchers are prepared Payments made promptly on due dates #mmediately recorded in accounting records

#ndependent employee reconciles subledgerto general ledger


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!is(s of 6aterial 6isstatement!is(s of misstatements

Subsidiary records not in agreement *ith

general ledger !eceiving reports and vouchers used

hapha=ardly Purchase transactions often not recorded until

payment is made

6any accounts payable long past due!is(s such as these indicate the need for

extensive substantive procedures


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Accounts Payable Audit

Steps +1 of 4,

A$ /se the understanding of the client and

its environment to consider inherent ris(s"

including fraud ris(s" related to accounts

payable$

>$ btain an understanding of internal

control over accounts payable$

$ Assess the ris(s of material misstatement

and design further audit procedures$


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Steps +2 of 4,

$ Perform further audit procedures?tests

of controls$

1$ 'xamples of tests of controls$a$ erify a sample of postings to the accounts payable control

account$

b$ ouch to supporting documents a sample of postings in

selected accounts of the accounts payable subsidiary ledger$

c$ est # application controls$

2$ #f necessary" revise the ris(s of material misstatement based

on the results of tests of controls$


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Steps +% of 4,'$ Perform further audit procedures?substantive

procedures for accounts payable$

1$ btain or prepare a trial balance of accounts payable

as of the balance sheet date and reconcile *ith the

general ledger$

2$ ouch balances payable to selected creditors by

inspection of supporting documents$

%$ !econcile liabilities *ith monthly statements from

creditors$

4$ onfirm accounts payable by direct correspondence

*ith vendors$


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Steps +4 of 4,'$ Substantive procedures +continued,

3$Perform analytical procedures for accounts payable

and related accounts$

5$ Search for unrecorded accounts payable$7$ Perform procedures to identify accounts payable to

related parties$

8$ 'valuate proper balance sheet presentation and

disclosure of accounts payable$


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Summary of Substantive Tests of

Accounts Payable


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Contrasting Confirmation of Accounts

Payable and Accounts Receivable

Accounts Payable Accounts Receivable

Primary Audit ompleteness 'xistence

b.ective

ther 'vidence 'xternal evidence #nternal evidence

Available held by client +i$e$$" +i$e$" sales invoices"

vendors0 invoices receiving reports,and statements,

onfirmation

@enerally )o es

!euiredB


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Search for /nrecorded ACP

>e alert during reconciliations"

confirmations and analytical procedures

for unrecorded liabilities

'xamine transactions recorded follo*ing

year-end ompare cash payments after year-end to aCp

trial balance 'xamine cash disbursements over specific

dollar amounts during subseuent period


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Potential Sources of

/nrecorded ACP/nmatched invoices and unbilledreceiving reports

ouchers payable entered in the voucher

register subseuent to balance sheet date

#nvoices received after balance sheet date

onsignments in *hich client acts as a

consignee


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Ad.usting entry neededB

6isstatements and omissions are .udged

based on impact on the financial

statements 6ateriality

• 'ffect on net income

• )eed to consider cumulative effect on the financial

statements


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Amounts *ithheld from

employees0 pay #ncome taxes *ithheld from employees0pay but not remitted as of balance sheet

date

race amounts *ithheld to payroll

summary sheets

est computations of taxes *ithheld and

accrued

etermine that taxes have been deposited

in accordance *ith la*


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Sales ax Payable

!euired to collect sales tax imposed by

state and local governments

)ot an expense" .ust collecting agent

&iabilities until remitted

erify liability by revie*ing tax return

est reasonableness of amount est invoices for correct tax charge

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/nclaimed *ages

Sub.ect to misappropriation

oncerned *ith adeuacy of internal

control Should not be left for more than a fe* day Prompt deposit in special ban( account

Analy=e unclaimed *ages to determine redit represents all unclaimed *ages after

each payroll distribution ebits represent authori=ed payments

14 23


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ustomers0 eposits

eposits on returnable containers or to

guarantee payment of bills

!evie* procedures follo*ed in accepting

and returning deposits

erify list of individual deposits and

compare to general ledger account

@enerally do not confirm


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Accrued &iabilities +1 of %,

bligations payable sometime during the succeeding

period for services or privileges received before balance

sheet date

'xamples: #nterest payable" accrued property taxes

Accounting estimates !evie* and test management0s process of developing

the estimate !evie* subseuent events #ndependently develop estimate to compare


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Accrued &iabilities +2 of %,

>asic audit steps

1$ 'xamine 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$%$ #dentify and evaluate the reasonableness of the assumptions made

that underlie the computation of the liability$

4$ est the computations made by the client in setting up the accrual$

3$ etermine that accrued liabilities have been treated consistently at

the beginning and end of the period$5$ onsider the need for accrual of other accrued liabilities not

presently considered +that is" test completeness,$

7$ Dor significant estimates" perform a retrospective analysis of the

prior year0s estimates for evidence of management bias$


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Accrued &iabilities +% of %,

Accrued Property axes

Accrued Payrolls

Pension Plan Accruals

Postemployment >enefits other than Pensions Accrued acation Pay

Product arranty &iabilities

Accrued ommission and >onuses

#ncome ax Payable Accrued Professional Dees


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Presentation

urrent liability Accrued expenses eferred income tax for next year eferred credits for rent eposits on contracts

&ong-term liability eferred income tax - noncurrent


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ime of 'xamination

6ost effective *hen performed

immediately after the balance sheet date

&ittle value if done before because

concern *ith understatements

Some can be done at interim: Accrued property taxes Amounts *ithheld from employees0 pay

auditing the acquisition process

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