Testing Purchases & Payables

Question 1

In most situations, are auditors more worried about existence or completeness when testing a client’s accounts payable?

Answer 1

Completeness, because in most situations, clients are more likely to understate than overstate liabilities.

Question 2

What common internal controls ensure the completeness of recorded purchase transactions?

Answer 2

Purchase orders and receiving reports are prenumbered and their sequence is accounted for.

Question 3

What common internal controls ensure the occurrence (existence) of recorded purchase transactions?

Answer 3

Vendor invoices are matched with purchase orders and receiving reports before being recorded in the purchases journal.

Question 4

What audit procedures are commonly used to test the occurrence (existence) of purchase transactions?

Answer 4

Select a sample of transactions from the purchases journal; examine the supporting vendor invoice, receiving report, and purchases order.

Question 5

What audit procedures are commonly used to test the completeness of purchase transactions?

Answer 5

Select a sample of receiving reports; trace them to the purchases journal.

Question 6

What audit procedures are commonly used to test the valuation of purchase transactions?

Answer 6

Select a sample of transactions from the purchases journal; test the quantities, prices, and mathematical accuracy by reference to the supporting documents.

Question 7

What audit procedures are commonly used to test the rights & obligations of purchase transactions?

Answer 7

Examine purchase contracts and vendor invoices to determine ownership.
Inquire about purchase commitments and rights of return.

Question 8

What audit procedures are commonly used to test the presentation and disclosure of purchase transactions?

Answer 8

Examine supporting documents to determine the propriety of account classifications (e.g., inventory, supplies, fixed assets, expenses).

Question 9

What audit procedures are commonly used to test the existence of accounts payable?

Answer 9

Select a sample from the accounts payable trial balance; examine vendor invoices and receiving reports or confirm balances with vendors.

Question 10

What audit procedures are commonly used to test the completeness of accounts payable?

Answer 10

1. Select a sample of January/February cash payments; trace to year-end accounts payable.
2. Select a sample of November/December receiving reports; trace to year-end accounts payable.
3. Send blank confirmation requests to major vendors.

Question 11

What audit procedures are commonly used to test the valuation of accounts payable?

Answer 11

Select a sample from the accounts payable trial balance; examine vendor invoices and receiving reports or confirm balances with vendors.
Foot the accounts payable trial balance and reconcile total to balance sheet.

Question 12

What audit procedures are commonly used to test the rights and obligations of accounts payable?

Answer 12

Examine purchase contracts and vendor invoices to determine ownership.
Inquire about purchase commitments and rights of return.

Question 13

What audit procedures are commonly used to test the presentation and disclosure of accounts payable?

Answer 13

Determine that long-term and short-term liabilities are properly classified on B/S.
Determine that related party liabilities are properly disclosed.
Determine that intercompany payables are eliminated in consolidation.

Question 14

Why is the auditor less likely to use confirmations to test accounts payable than accounts receivable?

Answer 14

1. Existence is a lower risk assertion for accounts payable.

2. External documents (e.g., vendor invoices) are more likely to be available.