Chapter 14 Accounts Payable

In an audit, the valuation of year-end accounts payable is most likely addressed by: (1) Confirmation (2) Examination of cash disbursements immediately prior to year end. (3) Examination of cash disbursements immediately subsequent to year end. (4) Analytical procedures applied to vouchers payable at year end.

(1) 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.

An audit of the balance in the AP account is ordinarily not designed to: (1) Detect AP that are substantially past due. (2) Verify that AP were properly authorized. (3) Ascertain the reasonableness of recorded liabilities. (4) Determine that all existing liabilities at the balance sheet date have been recorded.

(1) Detect AP that are substantially past due.

When confirming AP, the approach is most likely to be one of: (1) Selecting the accounts with the largest balances at year-end, plus a sample of other accounts. (2) Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. (3) Selecting a random sample of accounts payable at year-end. (4) Confirming all accounts.

(2) Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts.

What are three ways to approach the management's estimate relating to an accrued liability?

1. Independently develop an estimate of the amount to compare to management's estimate. 2. Review and test management's process of developing the estimate. 3. Review subsequent events or transactions bearing on the estimate.

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

Accounts payable arising from purchases of goods or services are usually evidenced by invoices and monthly statements received from the suppliers. In contrast, accrued liabilities generally accumulate on a time basis as a result of the company's obligation to pay salaries, pensions, interest, rent, taxes, and similar items. Invoices and monthly statements usually are not received for accrued liabilities

Ordinarily, the most significant assertion relating to AP is...

Completeness

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.

Is the confirmation of AP by direct communication with vendors as useful and important an audit procedure as such confirmations of AR? Explain.

No. The greatest hazard in the verification of liabilities is the existence of unrecorded liabilities. To confirm the recorded accounts payable does not prove whether any unrecorded accounts payable exist.

What is the primary concern of AP?

Possibility of understatement or omission (unrecorded) of liabilities.

What is the most likely way to identify duplicate payments?

Reconciliation of vendors' statements to accounts.

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

The auditors are concerned about possible UNDERSTATEMENT of liabilities, whereas their concern in the audit of assets is the possibility of overstatements. Also, in the audit of liabilities, the auditors seldom have problems with respect to valuation; while much of the work in the audit of assets deals with the propriety of asset valuations.

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

The most important single procedure in the auditors' search for unrecorded accounts payable is the REVIEW OF CASH TRANSACTIONS DURING THE FIRST FEW WEEKS FOLLOWING THE BALANCE SHEET DATE. Close study by the auditors of cash disbursements subsequent to the balance sheet date may reveal some items that should have appeared as liabilities on the balance sheet.

When searching for unrecorded liabilities, the assertion that we are gathering evidence on is ...

completeness.

Although confirmation of AP is not required as other reliable external evidence to support balance is likely to be available; confirmation can be performed and is likely to reduce...

detection risk.

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.

As part of the investigation of AP, 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?

By vouching entries in selected creditors' accounts back through the journals to original documents, the auditors acquire a firsthand knowledge of internal control in use. They may find that recording practices and internal control procedures differ significantly from those described by officials or specified in company manuals.

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 could not be presented to support payment a second time.

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

The purpose of the auditors' review of cash payments subsequent to the balance sheet date is to disclose any accounts payable which existed at the balance sheet date but were unrecorded. Comparison of the cash payments made after the balance sheet date with the accounts payable trial balance also furnishes evidence of the existence of the recorded payables.

List the major responsibilities of an AP dept.

Verification of invoices, distribution of charges to ledger accounts, preparation of journal entries summarizing the month's transactions, and the maintenance of subsidiary records.