Chapter 14 Account Payable and other Liabilities

Subsequent period

the time extending from te balance sheet date to the date of the auditors report.

A client erroneously recoded 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? a)footing the purchase journal b)reconciling vendors monthly statements with subsidiary payable ledger accounts c)tracing totals from the purchase journal to the ledger accounts d)sending written quarterly confirmation to all vendors.

b)reconciling vendors monthly statements with subsidiary payable ledger accounts.

When confirming accounts payable, the approach is most likely to be one of: a) selecting the accounts with the largest balance at year end, plus a sample of other accounts. b)selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. c)selecting a random sample of account payable at year end. d)confirming all accounts.

b)selecting the acccounts of companies with whom the client has previously done the most business, plus a sample of other accounts. explanation: this has the largest potential for understatement because the client has established high levels of credit. A sample of other accounts will ordinarily also be selected.

The least likely approach in auditing managements estimates relating to an accrued liability is to : a) independently develop an estimate of the amount to compare to managements estimate. b)review and test managements process of developing the estimate. c)review subsequent events or transactions bearing on the estimate. d)send confirmations relating to the estimate.

d) send confirmations relating to the estimate explanation: auditor estimate through independently developing an estimate, review managements process and then review subsequent events.

Identify three audit procedures (other than "search for unrecorded accounts payable") that are concerned directly or indirectly with disclosing unrecorded accounts payable.

1) reconcile liabilities with creditors monthly statements 2) confirm accounts payable through direct communication with vendors 3) Perform cutoff of accounts payable at year end to confirm inventory balance.

Suggest two reasons why the adjustments proposed by independent auditors more often than not call for reducing recorded earnings.

1. Management is usually under a stress to report higher earnings. Increase in earning delght stockholders, expedites financing, reassures creditors, and permits large bonuses and other compensations. 2. legal liabilities of auditors occur from the overstatement of earnings, asset, OE and understatement of liabilities. Lawsuits against CPA never arise because of understated earnings.

List the major responsibilities of an accounts payable department.

1. verification of invoices 2. distributing or allocating charges to ledge accounts 3. preparing general entries that summarize monthly transactions. 4. maintaining subsidiary records.

Voucher

A document authorizing a cash disbursement. A voucher usually provides space for the initials of employees performing various approval functions. The term voucher may also be applied to the group of supporting documents used as a basis for recording liabilities or for making cash disbursements.

Consignment

A transfer of goods from the owner to another person who acts as the sales agent of the owner.

Outline a method by which the auditors may test the propriety of cash discounts taken on accounts payable.

Auditors should calculate the ratio of the proportion of cash discounts received to the total purchases for the period. the ratio should be compared with the ratio of the previous years. and any substantial variations are carefully scrutinized.

What documentary evidence created outside the clients organization is particularly important to the auditors in verifying accrued property taxes?

Bills of property tax is considered as the most significant documented evidence formed outside the organization of the client, and used by the auditors in substantiating accrued property taxes.

Lawsuits against CPA firms are most likely to allege that the auditors were negligent in not detecting which of the following? (a) overstatement of liabilities and earnings (b) understatement of assets and earnings, or ( c) overstatement of owners's equity. Explain the reasoning underlying your choice.

C) an overstatement of owners equity. A-L=E Which means if there was and overstatement of OE than Assets are most likely overstated and Liabilities being understated.

Trade Accounts Payable

Current liabilities arising from the purchase of goods and services from trade creditors, generally evidenced by invoices or statements received from the creditors.

Vendors statements and accounts payable confirmations are both forms of documentary evidence created outside the client organization and useful in audit work on accounts payable. which of these two represents higher quality evidence? Why?

In the aspect of reducing the risk of document manipulation confirmation requests related to accounts payable are a higher quality of evidence than the vendors statemetnts because they are usaually sent directly by the vendors to the office of the auditors. Unlike vendor statements they are sent to the client and then given to the auditors.

If a corporation overstates its earnings, are its liabilities more likely to be overstated or understated? Explain.

Liabilities are more likely to be understated. If a corporation overstates its earnings, its liabilities are more likely to be understated in an effort to conceal expenses and overstate net income.

The operating procedures of a well-managed accounts payable department will provide for the verification of several specific points before a vendor's invoice is recorded as an approved liability. What are the points requiring verification?

The accounts payable department should ensure the following points are verified: 1. goods on invoice list were ordered and received. 2. the quality and quantity of goods are according to the specification. 3. the price, credit terms and shipping charges support the purchase agreement, 4. the computation is accurate.

What is the purpose of the auditors review of cash payments subsequent to the balance sheet date?

The main purpose of the auditors valuation of cash disbursements following to the date of b/s is to reveal any acct pay which remained at the date of b/s but were not documented. Comparison of the cash disbursements made after the balance sheet date with the trial balance of account payable also provides evidence of the existence of the recorded payables.

The auditors usually find in the client's possession documentary evidence, such as invoices, supporting both accounts receivable and accounts payable. Is there any difference in the quality of such evidence for accounts receivable and for accounts payable? Explain

There is a difference in the quality of evidence for accounts receivable and for accounts payable. The quality for Account payable is better in the means of their external evidence such as the vendors invoice and vendors monthly statements that support the acct pay. Accounts receivable only had the purchase order.

in an audit, the valuation of year end accounts payable is most likely addressed by: a)confirmation b)examination of cash disbursements immediately prior to year-end c)examination of cash disbursements immediately subsequent to year end. d)analytical procedures applied to vouchers payable at year-end.

a) confirmation, the best procedure to determine VALUATION of payables is confirmation.

to determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: a)authorize members of the audit committee. b)accounting departmetn c)individual who signs the checks d)chief executive officer.

c) individual who signs the checks, explanation: the person who signs the checks is ordinarily provided with supporting documents that provide support for the disbursement. that individual should manually or electronically "cancel" the documents so that the amount is not paid a second time.

ordinarily, the most significant assertion relating to accounts payable is: a)completeness b)existence c)presentation d)valuation

completeness, because an understatement of liabilities overstates income, auditors are ordinarly most concerned with the completenedd assertion for payables. Note, however in situations where a client may be motivated to understate income (minimize taxes), existence becomes a bigger concern.

What internal control activity would you recommend to call attention to a failure to pay invoices within the discount period?

recording invoices at the net amount with unveil any failure to process an invoice within the discount period/ Subsequently, a disbursement is required to discount lost expense account.

Vendor Statement

sent monthly by the vendor to indicate the beginning balance, current period purchases and payments, and ending balance

Accrued Liabilities (accrued expenses)

short term obligations for services of continuing nature that accumulate over time. examples, include interest, taxes, rent, salaries, and pensions. They generally are not evidenced by invoices or statements.

For which documents relating the the accounts payable operation would you recommend use of serial numbers as an internal control activity?

Vouchers and documents originating within the department.

Voucher register

a journal used in a voucher system to record liabilities requiring cash payment in the near future.

An audit of the balance in the accounts payable account is ordinarily not designed to: a)detect accounts payable that are substantially past due b) verify that accounts payable were properly authorized. c)ascertan the reasonableness of recorded liabilities. d) determine that all existing liabilities at the balance sheet date have been recorded.

a) the auditors do not have as an objective in the determination of whether accounts payable are past due.

Most auditors are interested in performing as many phases of an audit as possible in advance of the balance sheet date. The verification of accounts payable, however, generally is regarded as something to be done after the balance sheet date. what specific factors can you suggest that make the verification of accounts payable less suitable than many other accounts for interim work?

A significant change in accounts payable within a few weeks time shows the requirement for substantiating these accounts on or soon after the date of balance sheet. The other phase of examination relates to the search of unrecorded liabilities that cannot be performed adequately in advance at the year end.

Auditors usually send confirmations to obtain evidence about accounts receivable ad accounts payable. A) Is confirmation presumptively required for accounts receivable, accounts payable of both? B)Are accounts receivable request, accounts payable request, both mailed by the auditors (as opposed to client personnel?) c) which assertion do confirmation results most directly address - existence or completeness?

A) Confirmation of accounts is presumptively required, which confirmations of accounts payable is not. B) both forms of communication requests should be mailed by the auditors to ensure that such requests are not tampered with by client personnel. C)Confirmations most directly address existence in that they are sent to recorded accounts. They less directly address completeness sine accounts may exist of which the auditor may ne completely unaware, and therefore, not confirm.

What differences should auditors expect to find in supporting evidence for accrued liabilities as contrasted with accounts payable?

Accounts payable arise from procurements of goods or services are generally supported by monthly statements and invoices received from the suppliers, In contrast, accrued liabilities usually accumulate on a timely basis as an outcome of the companys obligations to pay salaries, interest, pensions, rent, taxes and other similar items. monthly statements and invoices generally are not received.

Explain how the auditors coordinate the year end cutoff of accounts payable with their observation of the year-end physical inventory.

Cut off related to accounts payable is associated with the cut-off purchase invoices in defining the year-end physical inventory. On the receipt of physical inventory on Dec 31, the auditors make a record of the serial numbers of the last receiving report issued. These numbers need to be recoginized with the corresponding vendors invoice on the list of accounts payable on Dec. 31. Any invoice associated with a later received report must not be a part of the amount on accounts payable at the year end. ***cut off at year end must assure that a liability is documented for any goods received on the last day of the year and incorporated in the physical inventory. Otherwise, the income before taxes will be overstated by the full amount of the deleted invoice.

Confirmation

Direct communication with vendors or suppliers to determine the amount of an accounts payable. Represents high quality evidence because it is a document created outside the client organization and transmitted directly to the auditors.

Assume that a highly placed employee has stolen company assets and is now planning to conceal the fraud by failing to make an accounting entry for a large transaction. Would the omission probably be for a transaction creating an asset or a liability? Explain.

In this case the asset is stolen and for that a physical count of assets is necessary. Transaction creating an asset such as inventory.

Is the confirmation of accounts payable by direct communication with vendors as useful and important tan audit procedure as such confirmation of accounts receivable?

No, the confirmation related to accounts payable is not as useful as the audit procedure as the confirmation related to accounts receivable. The main issue with confirmation of accounts payable is it does not account for if unrecorded liabilities exist.

Which do you consider the more significant step in establishing strong internal control over accounts payable transactions: the approval of an invoice for payment, or the issuance of a check in payment of an invoice? Explain.

The approval of an invoice for payment is a more significant step in establishing a strong internal control because when an invoice has been approved then the issuance of a check is an automatic process.

During the verification of he individual invoices composing the total of accounts payable at the balance sheet date, the auditors discovered some receiving reports indicating that the merchandise covered by several of these invoices was not received until after the balance sheet date. What action should the auditors take?

The auditors should determine the nature of the receiving report when the consignment reaches, whether invoices were paid before goods were received. Need to clarify if any goods are in transit.

What do you consider to be the most important single procedure in the auditors search for unrecorded accounts payable? Explain.

The most effective means of disclosing unrecorded accounts payable is to compare cash payments after year end to accounts payable trial balance.

Describe briefly, an internal control activity that would prevent a paid disbursement voucher from being presented for payment a second time.

The official who signs checks should stamp or perforate the voucher and supporting documents so that they cannot be presented to support payment a second time.

In achieving adequate internal control over operations of the accounts payable department, a company should establish procedures that will ensure that extensions and footings are proved on all invoices and that the propriety of prices is reviewed. What is the most effective means of assuring consistent performance of these duties?

There should be a check mark and initials placed on the amounts footed.

As part of the investigation of accounts payable, auditors sometimes vouch entries in selected creditors accounts back through the journals to original documents, such as purchase orders, receiving reports, invoices, and paid checks. What is the principal purpose of this procedure?

This procedure is necessary to determine the operating effectiveness of certain controls. The vouching of individual items from the ledgers to the original records may provide the auditors with sufficient evidence to assess control risk for certain assertions related to accounts payable.

Compare the auditors' approach to the verification of liabilities with their approach to the verification of assets.

Verification of liabilities: 1) auditors are concerned with the possibility of an understatement of liabilities. Verification of assets:1)auditors are concerned with the possibility of overstatement of the assets.

whitehall company records its liabilities in an accounts payable subsidiary ledger. the auditors have decided to select some of the accounts for confirmation by direct communication with vendors. the largest volume of purchases during the year has been made from from Ranchero Company, but at the balance sheet date this account has a zero balance. Under thses circumstances, should the auditors send a confirmation request to Ranchero Company, or would they accomplish more by limiting their confirmation program to account with larger year end balances?

Yes the auditors should send a confirmation even is the records indicate a zero balance at year end because Ranchero is the largest vendor of whitehalls. A reply from Ranchero might specify that a liability exists and give rise of unrecorded liabilities.

For effective internal control, the accounts payable department should compare the information on each vendors invoice with the: a)receiving report and the the purchase order b)receiving report and voucher c)vendors packing slop and the purchase order d)vendors packing slip and the voucher.

a) receiving report and the purchase order. receiving report to determine that it was received and the purchase order to determine that it was ordered.

In performing a test of controls, the auditors vouch a sample of entries in the purchase journal to the supporting documents. which assertion would this test of controls most likely test? a)completeness b)existence c)valuation d)Rights

b) existence

Which of the following procedure is least likely to be completed before the balance sheet date? a) confirmation of receivables b)search for unrecorded liabilities c)observation of inventory d) review of internal accounting control over cash disbursements.

b) search for unrecorded liabilities Explanation: 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.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: a) this is a duplication of cutoff tests. b)accounts payable balanced at the balance sheet date may not be paid before the audit is completed. c)correspondence with the audit clients attorney will reveal all legal action by vendors for nonpayment. d)there is likely to be other reliable external evidence available to support the balances.

d) auditors will usually find in the clients 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.

which of the following is the best audit procedure for determining the existence of unrecorded liabilities? A)Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. b) examine unusual relationships between monthly accounts payable balances and recorded purchases. c)examine a sample of invoices a few days prior to and subsequent to year end to ascertain whether they have been properly recorded. d)examine selected cash disbursements in the period subsequent to year-end.

d)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 appear in in the balance sheet.