Chapter 14 Flashcards
Sources of A/P
- Short- Term Obligations arising from purchase of goods and services in ordinary course of business
- acquisition of merchandise on credit
- receipt of services such as advertising, repairs.
- Invoices and statements from suppliers usually evidence a/p
- Interest-bearing obligations are not included in A/P; they are included as bonds, notes, etc.
Sources of Accrued Liabilities
Sometimes called accrued expenses
Accumulated over time and management must make accounting estimate at year-end.
- Not that if management does not make such an estimate, no entry will occur since the related transactions (e.g., interest) may have occurred months ago.
Objective for the Audit
1- Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to accounts payable.
2- obtain an understanding of internal control over A/P
3- Assess the risks of material misstatement and design tests of controls and substantive procedures that:
a- substantiate the existence obligation
b- establish the completeness
c- verify the cutoff
d- establish the proper valuation and the accuracy
e- determine that the presentation and disclosure
Primary Concern
Possibility of understatement or omission of liabilities
- exaggerates the financial strength of company
- conceals fraud as effectively as overstatement of assets.
- accompanied by understatement of expenses and overstatement of net income.
Controls over the Acquisition Cycle
- 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.
- Approval of vendors’ invoices.
- Pre-numbered checks.
- Reconciliation of details of individual disbursements to controlling accounts.
- Reconciliation of vendor’s statement to accounts.
- Reconciliation of bank accounts.
- Use of budgets and analysis of variances
- Use of chart of accounts and review of account coding.
Acquisition cycle- Documents
- Purchase order
- Receiving Report
- Vendor’s invoice
- Vendor’s Statement.
Audit Documentation
Working Papers
- Lead schedule for A/P
- Trial balances of various type of a/p
- Confirmation requests for a/p
- Listing of unrecorded A/P
Description of Misstatement
- Inaccurate recording of a purchase or disbursement
- Misappropriation of purchases.
- Duplicate recording of purchases.
- Late (early) recording of cost of purchases- “cutoff problems”
Controls against misstatements
- Auditors found serially numbered receiving reports are prepared.
- Serially numbered vouchers are prepared
- Payments made promptly on due dates.
- Immediately recorded in Accounting records.
- Independent employees reconcile sub-ledgers to general ledger.
Risk of misstatements
- Subsidiary records not in agreement with general ledger
- receiving reports and vouchers used haphazardly
- purchase transactions often not recorded until payment is made.
- many accounts payable long past due.
Risks sus as these indicate the need for extensive substantive procedures.
Perform further audit procedures- test of controls
a- Verify a sample of posting to the A/P control account.
b- Vouch to supporting documents a sample of postings in selected accounts of the A/P subsidiary ledger.
c- Test IT application controls.
d- If necessary, revise the risks of material misstatement based on the results of tests of controls.
Perform further Audit procedures- substantive procedures for A/p
1- Obtain or prepare a trial balance of payable and reconcile with the general ledger. (valuation and accuracy)
2- Vouch balance payable to selected creditors by inspection of supporting documents. (Existence, occurrence, and obligations. valuation and accuracy cutoff)
3- reconcile liabilities with monthly statements from creditors. (completeness)
4- Confirm A/P by direct correspondence with vendors. (existence, occurrence, and obligation)
5- Perform analytical procedures for A/P and related accounts. (valuation and accuracy)
6- Search for unrecorded A/P (completeness and cutoff)
7- Perform procedures to identify A/P to related parties. (presentation and disclosure)
8- Evaluate proper balance sheet presentation and disclosure of A/P (presentation and disclosure)
Unrecorded A/P
Be alert during reconciliations, confirmations and analytical procedures for unrecorded liabilities.
Examine transactions recorded following year-end:
- compare cash payments after year-end to a/p trial balance.
- examine cash disbursements over specific dollar amounts during subsequent period.
Potential Sources of Unrecorded A/P
- Unmatched invoices and unbilled receiving reports.
- Vouchers payable entered in the voucher register subsequent to balance sheet date
- Invoices received after balance sheet date
- Consignments in which client acts as a consignee.
Adjusting entry needed?
Misstatements and omissions are judged based on impact on the financial statements.
- Materiality
- Effect on net income.
- Need to consider cumulative effect on the financial statements.
Accrued Liabilities
Obligations payable sometimes during the succeeding period for services or privileges received before balance sheet date.
Accounting estimates.
- Review and test management’s process of developing the estimate
- Review subsequent events.
- Independently develop estimate to compare.
Accrued Liabilities - audit steps
1- Examine any congrats or other documents on hand that provide the basis for the accrual.
2- Appraise the accuracy of the detailed accounting records maintained for this category of liability.
3- Identify and evaluate the reasonableness of the assumptions made that underlie the computations of the liability.
4- Test the computations made by the client in setting up the accrual.
5- Determine that accrued liabilities have been treated consistently at the beginning and end of the period.
6- Consider the need for accrual of other accrued liabilities not presently considered (that is, test completeness).
7- For significant estimates, perform a retrospective analysis of the prior year’s estimates for evidence of management bias.
Time of Examination
- Most effective when performed immediately after the balance sheet date.
- Little value if done before because concern with understatements.
- Some can be done at interim:
- Accrued property taxes
- Amount withheld from employees’ pay.
