Ch. 14 - Accounts Payable and Other Liabilities

In an audit, the valuation of year-end accounts payable is most likely addressed by:

Confirmation. The best procedure to determine valuation of payables is confirmation. Examination of cash disbursements in the subsequent period is more directed towards completeness of payables. Analytical procedures may be useful but would not be as effective as confirmation with respect to the valuation assertion.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine selected cash disbursements in the period subsequent to year-end. Examining selected cash disbursements in the period subsequent to the year-end is the best audit procedure for determining the existence of unrecorded liabilities. All liabilities must eventually be paid, and will therefore be reflected in the accounts when paid if not when incurred. By close study of payments made subsequent to the balance sheet date, the auditors may find items that should have appeared in the balance sheet.

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the:

Receiving report and the purchase order. Each vendor's invoice should be compared with the receiving report (to determine that it was received) and the purchase order (to determine that it was ordered). WRONG ANSWER EXPLANATION: (2) Receiving report and the voucher is incomplete because of the omission of the purchase order.(3) Vendor's packing slip and the purchase order and (4) Vendor's packing slip and the voucher are incorrect because the receiving report, prepared by the company itself, provides better evidence of what has been received than the vendor's packing slip.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts. The most efficient way in which the duplicate recording of a purchase transaction may be detected is by reconciling the related payable accounts with vendors' statements.

Which of the following procedures is least likely to be completed before the balance sheet date?

Search for unrecorded liabilities. Because a significant portion of the search for unrecorded liabilities deals with transactions recorded after year-end, it is least likely to be completed before the balance sheet date.

The least likely approach in auditing management's estimate relating to an accrued liability is to:

Send confirmations relating to the estimate. Auditors audit estimates through (1) independently developing an estimate, (2) reviewing management's process, and (3) reviewing subsequent events. There often is no one to send a confirmation related to the estimate.

Ordinarily, the most significant assertion relating to accounts payable is:

Completeness. Because an understatement of liabilities overstates income, auditors are ordinarily most concerned with the completeness assertion for payables. Note, however, that in circumstances in which a client may be motivated to understate income (e.g., to minimize taxes), existence becomes a bigger concern.

An audit of the balance in the accounts payable account is ordinarily not designed to:

Detect accounts payable that are substantially past due. The auditors do not have as an objective the determination of whether accounts payable are past due.

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?

Existence. Vouching from the purchases journal to the supporting documents provides evidence with respect to the existence assertion for purchases.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the:

Individual who signs the checks. The individual who signs the checks should ordinarily be provided with supporting documents that provide support for the disbursement. That individual should then manually or electronically "cancel" the documents so that the amount isn't paid a second time.

When confirming accounts payable, the approach is most likely to be one of:

Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. Accounts payable confirmations are ordinarily sent to suppliers with whom the client has done the most business. This is because the largest potential for an understatement may exist due to the client having established high levels of credit. A sample of other accounts will ordinarily also be selected.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

There is likely to be other reliable external evidence available to support the balances. Auditors will usually find in the client's possession externally created evidence such as vendors' invoices and statements that substantiate the accounts payable. No such external evidence is on hand to support accounts receivable.