Audit 2 Chapter 14
confirming A/P
not presumptively mandatory because there are many ways to substantiate A/P. typically send positive blank confirmations to find things other than what the client listed. typically test companies they do a lot of business with or related parties (regardless if they have a 0 balance).
substantive procedures for AP
obtain or prepare a trial balance of AP as of the balance sheet date and reconcile with the GL. vouch balances payable to selected creditors by inspection of supporting documents. reconcile liabilities with monthly statements from creditors. confirm accounts payable by direct correspondence with vendors. perform analytical procedures for AP and related accounts. search for unrecorded AP. perform procedures to identify AP to related parties. evaluate proper balance sheet presentation and disclosure of AP.
advance payments
paying in advance before receiving goods. this is not a payable, its a receivable. have to make a top side entry (which is only for financial statements, not for the books).
types of accrued liabilities
property taxes, payrolls, pension plans, postemployment benefits, vacation pay, product warranty liabilities, commissions and bonuses, income taxes payable, and accrued professional fees
balance sheet presentation
accrued expenses are included in current liabilities. income tax payable as separate.
accrued liabilities
accumulate over time, and management must make accounting estimates of the year end liability (ex: salaries, pensions, interest, rent, taxes)
policy on what to pay off
always pay off invoices, not monthly statements. invoices are at time of purchase, but monthly statements list any o/s invoices.
other current liabilities
amounts withheld from employees pay, sales taxes payable, unclaimed wages, customer's deposits, and accrued liabilities
when searching, look at:
check register- checks written after year end and compare to dates on voucher packages. open invoice files - bills waiting to be paid might need to have been accrued consignments - check to see if sold and if they owe them a cut
substantive procedure: analytical procedures
compare ratios to PY (purchases as a % of A/P and A/P as a % of current liabilities should be consistent over time). compare amounts owed to individual creditors to PY. % of A/P that is overdue at year end could indicate financial trouble.
primary assertion with liabilities
completeness.
auditing steps for accrued liabilities
examine any contracts or other documents on hand that provide the basis for accrual. appraise the accuracy of the detailed accounting records maintained for this category of liability. identify and evaluate the reasonableness of he assumptions made that underlie the computation of the liability. test the computations made by the client in setting up the accrual. determine the accrued liabilities have been treated consistently at the beginning and end of the period consider the need for accrual of other accrued liabilities not presently considered. for significant estimates, perform a retrospective analysis of the prior year's estimates for evidence of management bias.
substantive procedure: search for unrecorded AP
examine transactions after year end, close to the end of field work/the audit (especially all cash disbursements over specific dollar amounts that are made by the client during the subsequent period). make sure to consider materiality of unrecorded transactions (put it on SUD if immaterial because it might be material in the aggregate)
related parties
have to be reported separately from trade A/P
substantive procedure: obtain or prepare a trial balance of AP as of the balance sheet date and reconcile with the GL
helps determine if the liability on the balance sheet agrees with the records but also provides a starting point for substantive procedures (use them to select samples).
to gain an understanding of internal control, auditors will..
inspect reconciliations of monthly statements from vendors to the payables ledger, budgets for cash disbursements, and evidence of the follow up on variances from budgeted amounts of disbursements.
you should confirm A/P when
internal controls are weak. there are accounts with unusual activities or related parties. there are many vendors that don't send monthly statements. if there is A/P pledged by assets.
industries that you need to be cautious about liabilities
kids toys and cars. there are lots of safety/recall issues that might need to bump up warranty reserves. tax laws say you can't record the reserves until you actually incur the cost (you can't defer paying taxes on it)
confirm of accounts payable is ___ important than confirmation of accounts receivable.
less. due to lots of external evidence such as vendor's invoices that substantiate AP, as well as the fact that their main concern is the client not including all their APs (not lying about the valuation)
options with accounting estimates
look at how management came up with the estimate. calculate the estimate on your own. look at subsequent events that bear on the item
when reconciling liabilities with monthly statements...
make sure you adjust for inventory in transit.
time of examination
most auditors believe AP work should be performed after the balance sheet date. the preliminary work (before year end) includes accrued property taxes, amounts withheld from employees pay, and amounts withheld and remitted to tax authorities.
ways to number invoices
need a policy on this in order to not have duplicates. 12345, INV12345, 00012345 (bleeding zeros)
internal control over A/P
purchasing determines that the item should be ordered and selects appropriate vendor, then issues purchase order and sends copies to stores, receiving, and AP departments. receiving counts/inspects the goods and notifies other departments upon receipt. AP vouchers should be stamped with the date received. before invoices are paid, they need written evidence of the transaction, and then the voucher should be stamped/perforated so they can't be presented for payment another time. also reconcile monthly balancing of the detailed records of AP to the GL.
vendor's statements
received monthly and should be reconciled promptly with the AP ledger or list of open vouchers. shows the customer's beginning balance, invoices, credits, payments, and ending balances.
accounts payable
short term obligations arising from the purchase of goods and services in the ordinary course of business.
voucher packages
should match purchase order, receiving reports, and invoices. easiest time to analyze is at year end because it hasn't been paid yet.
test of control: vouch to supporting documents a sample of postings in selected accounts of the AP subsidiary ledger
test the voucher register or the AP ledgers by vouching specific items back through the cash payments journal and purchases journal to their original documents (such as purchase orders, receiving reports, invoices, and paid checks) helps assess risk. or you can use the audit trail in the opposite direction (source documents to the AP ledger) to assure accurate and timely recordings.
auditors are primarily concerned with this concerning liabilities
understatement or omission. most difficult to detect is the failure to make an entry. understating liabilities affects i/s and b/s.
potential sources of unrecorded payables
unmatched invoices and unbilled receiving reports (work in processes). vouchers payable entered in the voucher register subsequent to the balance sheet date. invoices received by the client after the balance sheet date. consignments in which the client acts as a consignee.
test of control: verify a sample of postings to the AP control account
validity of the amount in the GL for AP is established by tracing postings to the voucher register and cash disbursements journal.
inherent control over liabilities
vendors want to get paid and hopefully send statements of what is owed.
tests of controls for AP
verify a sample of postings to the AP control account. vouch to supporting documents a sample of postings in selected accounts of the AP subsidiary ledger. test IT application controls.