slide 14- 1 © the mcgraw-hill companies, inc., 2006 accounts payable and other liabilities l...

1 © The McGraw-Hill Companies, Inc., 2006

Accounts Payable and

Other Liabilities Besides Accts Payable:

Accrued Liabilities

Misc. S/T 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


Acquisition Cycle Documents

Client Purchase Order

Client Receiving Report

Vendor Invoice

Vendor Monthly Statement

Client Check Disbursement


Most Likely MisstatementsAccounts Payable and Related

Accounts Incorrect recording- purchase/disbursement Misappropriation of purchases Embezzlement (disbursement or purchase) Duplicate payments for purchases Unrecorded disbursements Out-of-Period recording of purchases or

disbursements Failure to accrue liabilities


Objectives of Substantive Tests of Accounts Payable

and Purchases

Substantiate the Existence of recorded accounts payable and occurrence of purchases

Establish the Completeness of accounts payable and purchase transactions

Determine that the client has Obligations(Right) to pay the recorded accounts payable

Establish the clerical accuracy of records and supporting schedules

Determine that the Valuation of accounts payable is in accordance with GAAP

Determine that the Presentation and disclosure of accounts payable and purchases are appropriate


Substantive Tests of Accounts Payable and

Related Accounts

Obtain trial balance of accounts payable and reconcile with the ledgers



Related Accounts Obtain trial balance of accounts payable and reconcile

with the ledgers

Vouch balances payable to selected vendor invoices

Reconcile recorded liabilities with vendors’ statements




with the ledgers Vouch balances payable to selected vendor invoices Reconcile recorded liabilities with vendors’ statements

Confirm accounts payable


Contrasting Confirmation of Accounts Payable and Accounts Receivable

Accounts Payable Accounts Receivable

Primary Audit Completeness Existence Objective

Other Evidence

Available

Confirmation Generally Required?


Contrasting Confirmation of Accounts Payable and Accounts

Receivable


Primary Audit Completeness Existence

Objective

Other Evidence External evidence Internal evidence Available held by client (i.e., (i.e., sales invoices)

vendor invoices Little external evidence and statements)

Confirmation Generally Required?


Contrasting Confirmation of Accounts Payable and Accounts Receivable


Primary Audit Completeness Existence

Objective

Other Evidence External evidence Internal evidence

Available held by client (i.e., (i.e.., sales invoices,

vendor invoices receiving reports, and statements)

etc.)

Confirmation Generally Required? NO YES




with the ledgers Vouch balances payable to selected vendor invoices Reconcile recorded liabilities with vendors’ statements Confirm accounts payable

Perform analytical procedures




with the ledgers Vouch balances payable to selected vendor invoices Reconcile recorded liabilities with vendors’ statements Confirm accounts payable Perform analytical procedures

Perform search for unrecorded liabilities


The Big Search This is the KEY substantive test for A/P Be alert throughout the audit (esp, in

audit of cash, inventories, capital leases) Specific Steps:

1. Review cash disbursements for 1 to 2 weeks after B.S. date

2. Identify unmatched P.O.s, receiving reports, invoices around year-end

3. Review invoices rec’d shortly after year-end




with the ledgers Vouch balances payable to selected vendor invoices Reconcile recorded liabilities with vendors’ statements Confirm accounts payable

Perform analytical procedures Perform search for unrecorded liabilities

Evaluate other current liabilities


Other (Accrued) Liabilities

Payroll Liabilities Commissions Employee Bonuses Deferred

Compensation Income Tax Payable Property Taxes

Pension Liabilities Postretirement Benefits Employee Vacation Warranty Liabilities Customer Deposits Sales Tax Payable


Other (Accrued) Liabilities

Key Audit Approach Identify missing ones by asking client,

looking at recorded expenses for ones that should have accruals and brainstorm ones that should be there

Then, evaluate computations like any accounting estimate.

Consider asking for Help from specialists.




with the ledgers Vouch balances payable to selected vendor invoices Reconcile recorded liabilities with vendors’ statements Confirm accounts payable Perform analytical procedures Perform search for unrecorded liabilities Evaluate other current liabilities

Identify related party payables




with the ledgers Vouch balances payable to selected vendor invoices Reconcile recorded liabilities with vendors’ statements Confirm accounts payable Perform analytical procedures Perform search for unrecorded liabilities Evaluate other current liabilities Identify related party payables

Evaluate financial statement presentation and disclosure