Chapter 14
procedure- perform procedures to identify accounts payable to related parties
- AP to corporations officers, directors, or stockholders - if material, must be disclosed in the notes - presentation/disclosure, valuation/allocation/accuracy assertions
comparison of evidence
- accounts receivable- client prepared invoice (weak). confirmations stronger - accounts payable- vendor invoice, vendor statement (3rd party evidence is strong)
tests of controls
- test specific items in the AP ledger to cash payments journal original documents including PO, receiving, invoice, and paid check. all necessary to determine the operating effectiveness of controls
which of the following is an example of an accrued liability? 1. accounts payable 2. notes payable 3. prepaid insurance 4. product warranty liability
4
ordinarily, the most significant assertion relating to accounts payable is:
completeness
accounts payable
concern that it is understated and complete
in an audit, the valuation of year-end accounts payable is most likely addressed by
confirmation
an audit of the balance in the accounts payable account is ordinarily not designed to
detect accounts payable that are substantially past due
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
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
procedure- reconcile liabilities with monthly statements from creditors
- completeness/cutoff assertion
procedure- vouch balances payable to selected creditors by inspection of supporting documents
- creditors balance = invoices, POs, and receiving reports - presentation/disclosure, rights/obligations, completeness/cutoff, valuation/allocation/accuracy assertions
how would a company understate a liability?
- failure to make an entry that would of caused a liability - omission of an entry - hardest fraud to catch - look at subsequent events--bills paid after year-end
procedure- confirm accounts payable by direct correspondence with vendors
- less necessary than AR - auditor can look at vendor invoice and vendor statement - AP confirms- mailed out to vendors for which substantial purchases were made even if ending balance=0 - existence/occurrence, rights/obligations, completeness/cutoff, valuation/allocation/accuracy assertions
procedure- obtain or prepare a trial balance of accounts payable as of the balance sheet date and reconcile with GL
- liability figures appearing in BS are in agreement with individual items comprising the detailed records - valuation, allocation, and accuracy assertion
accrued liabilities
- obligations payable sometimes during the succeeding period for services or privileges received before the balance sheet date - accounting estimates made by the client that will subsequently become payable
procedure- perform analytical procedures for AP
- overall reasonableness of AP - valuation/allocation/accuracy assertion
procedure- evaluate proper balance sheet presentation and disclosure of accounts payable
- presentation and disclosure DUHHHH BITCHHHH
contrasting confirmation of accounts payable and accounts receivable
- primary objective: AP-completeness, AR-existence - other evidence available: AP-external evidence, vendor invoices and vendor statements, AR-internal evidence, client's invoice and client's shipping documents - confirmation generally required: AP-no, AR-yes -
internal control over accounts payable
- 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--3-way match - approval of vendors' invoices - pre-numbered checks - reconciliation of details of individual disbursements to controlling accounts-- department director reviews monthly report showing disbursements for department - reconciliation of vendors' statements to accounts - reconciliation of bank accounts - use of budgets and analysis of variances - use of chart of accounts and review or account coding
procedure- search for unrecorded accounts payable
- transactions following year-end - comparison of cash payments occurring after balance sheet date with AP trial balance - most effective mean of disclosing unrecorded AP - unmatched invoices - unmilled receiving reports - invoices received by client after balance sheet date - this testing would occur after the end of the year - completeness/cutoff assertion
what is the auditor's primary concern with liabilities?
- understatement or omission of liabilities - overstate financial statements or strength position - conceal a fraud - delaying the recording of bills for december operating expenses until january - determination of completeness
which of the following audit procedures is best for identifying unrecorded accounts payable? 1. reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period 2. investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports 3. examining unusual relationships between monthly accounts payable balances and recorded cash payments 4. reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date
1
which of the following best describes the auditors' approach to the audit of accrued liabilities? 1. test computations 2. confirmations 3. observation 4. a low planned assessed level of control risk
1
when the auditors discover an understatement of liabilities, they would most likely also expect to find an: 1. understatement of assets 2. understatement of owner's equity 3. overstatement of expenses 4. understatement of revenues
1. or an understatement of expense overstating an asset account usually requires an improper entry in the accounting records-- recording a fictitious transaction
auditors may choose not to confirm accounts payable because: 1. confirmation obtains evidence identical to that obtained by cutoff tests 2. other reliable external evidence to support the balances is likely to be available 3. a reading of the corporate minutes reveals that confirmation is unnecessary 4. the balances due with have changed between the year-end and the date of the confirmation
2
which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable 1. footing the list of accounts payable 2. examining underlying documentation for cash disbursements in the period after year-end 3. tracing shipping reports issues on or before year-end to related customer purchase orders and invoices 4. tracing shipping reports after year-end to related customer purchase orders and invoices
2
the auditors' search for unrecorded liabilities is completed: 1. during an interim period 2. at the balance sheet date 3. subsequent to the balance sheet date 4. at any time during the examination
3
when an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? 1. accounts receivable 2. accrued liabilities 3. cash 4. cost of goods sold
3
which of the following best describes the specific accounting payable that are selected for confirmation? 1. accounts with large balances 2. accounts with zero balances 3. accounts with a large amount of activity regardless of their balance 4. accounts for which vendor statements are available
3
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
#1 control of accounts payable
our client's AP is the AR of another company, and the client's creditors will maintain complete records
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
a client erroneously recorded a large purchase twice. which of the following internal control measure would be most likely to detect this error in a timely and efficient matter?
reconciling vendors' monthly statements with subsidiary payable ledger accounts
which of the following procedures is least likely to be completed before the balance sheet date?
search for unrecorded liabilities
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
the least likely approach in auditing management's estimate relating to an accrued liability is to:
send confirmations relating to the estimate
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