Accounts payable audit procedures and assertions


  • Audit Procedures for Accounts Payable
  • Auditing Accounts Payable and Expenses: A Guide
  • The Complete Guide to Accounts Payable (AP) Audits
  • Audit Procedures for Accounts Payable – Risks and Assertions Included
  • What Are Audit Assertions and Why They Are Important
  • Audit Procedures for Accounts Payable

    Reconciling the related bank statements Which persons have access to check stock and where is the check stock stored? Who can add vendors to the payables system? Who reconciles the bank statements and how often?

    As we ask these questions, we inspect documents e. So, we are inquiring, inspecting, and observing. If controls weaknesses exist, we create audit procedures to respond to them. For example, if--during the walkthrough--we see that one person prints and signs checks, records payments, and reconciles the bank statement, then we will perform fraud-related substantive procedures more about this in a moment. Here's a short video about risk assessment for accounts payable auditors. Directional Risk for Accounts Payable and Expenses The directional risk for accounts payable and expenses is an understatement.

    So, perform procedures to ensure that invoices are properly included. For example, perform a search for unrecorded liabilities see below. Primary Risks for Accounts Payable and Expenses The primary risks for accounts payable and expenses are: Accounts payable and expenses are intentionally understated Payments are made to inappropriate vendors Duplicate payments are made to vendors Keep these in mind as you audit accounts payable.

    By making payments to fictitious vendors , for example. Or intentionally paying a vendor twice--and then stealing the second check. See the section titled Auditing for Fraud below. Risks of Material Misstatement for Payables and Expenses In smaller engagements, I usually assess control risk at high for each assertion.

    When I assess control risk at less than high, I have to test controls to support the lower risk assessment. Therefore, assessing risks at high is usually more efficient than testing controls. The assertions that concern me the most are completeness, occurrence, and cutoff. So my RMM for these assertions is usually moderate to high. My response to higher risk assessments is to perform certain substantive procedures: namely, a search for unrecorded liabilities and detailed expense analyses.

    The particular expense accounts that I examine are often the result of my preliminary planning analytics. Search for Unrecorded Liabilities How does one perform a search for unrecorded liabilities? How should you perform a detailed analysis of expense accounts?

    First, compare your expenses to budget—if the entity has one—or to prior year balances. Theft can occur in numerous ways—such as fictitious vendors or duplicate payments. If control weaknesses are present, consider performing fraud-related procedures.

    When fraud-related control weaknesses exist, assess the RMM for the occurrence assertion at high. There is a risk that the expense the occurrence is fraudulent.

    So, how should you respond to such risks? Auditing for Fraud An example of a fraud-related test is one for duplicate payments. Obtain a check register in Excel Sort by the vendor Scan the check register for payments made to the same vendor for the same amount Inquire about payments made to the same vendor for the same amount In a duplicate payment fraud, the thief intentionally pays an invoice twice. He steals the second check and converts it to cash. This is just one example of expense fraud.

    There are dozens of such schemes. Substantive Procedures for Accounts Payable and Expenses My customary audit tests are as follows: Vouch subsequent payments to invoices using the steps listed above in Search for Unrecorded Liabilities Compare expenses to budget and examine any unexplained variances When control weaknesses are present, design and perform fraud detection procedures If there are going concern issues, you may need to examine the aged payables listing.

    Management can fraudulently shorten invoice due dates. Doing so makes the company appear more current. The company changes the due dates in the accounts payable system, causing the invoices to appear as though they were due just thirty days ago. Now the aged payables listing looks better than it would have. Typical Payable and Expense Work Papers My accounts payable and expense work papers usually include the following: An understanding of internal controls as they relate to accounts payable and expenses Risk assessment of accounts payable and expenses at the assertion level Documentation of any accounts payable and expense control deficiencies Accounts payable and expense audit program An aged accounts payable detail at period-end A search for unrecorded liabilities work paper Budget to actual expense reports and, if unexpected variances are noted, a detailed analysis of those accounts Fraud-related expense work papers if significant control weaknesses are present So, now you learned about auditing accounts payable.

    My next post addresses auditing payroll. Consequently, knowing how to audit payroll expenses is of great importance. So, stay tuned. See my prior posts in The Why and How of Auditing. Get your copy of the Why and How of Auditing.

    Audit Introduction In this article, we will cover the audit procedures for Accounts Payable. In most circumstances, we commonly call Accounts Payable as Trade Payable.

    It is really important to perform proper audit procedures for Accounts payable as this is a critical portion of financial records and considered to be one of the high-risk items in the financial statements. In the accounts payable audit there is a high-risk of misstatement due to fraud or error, so strong accounts payable audit procedures are required to ensure the accuracy.

    Objectives of Accounts Payable Audit The main objectives of accounts payable audit are as follow: To ensure completeness of the accounts payable To ensure the existence of the accounts payable reported in the Balance Sheet To ensure that there is enforceable rights and obligations for the accounts payable To ensure the accuracy of accounts recorded in the Balance Sheet To ensure the valuation and allocation has been properly carried out for the recording of accounts payable Last but not least, the objective of auditing accounts payable is to ensure that there is proper presentation and disclosures in the financial statements.

    Risks and Control Deficiencies in Relation to the Accounts Payable In this section, we cover the risks for the accounts payable as well as the control deficiencies sometimes called internal control deficiencies that may happen for the accounting and management of accounts payable.

    Below are the key risks associated with the accounts payable that we commonly encounter so far: An entity or management may intentionally account for or understate the accounts payable There is risk of duplicate payment to vendors as well as the payments were made to inappropriate suppliers or vendors. There is risk of late or missed payment to suppliers or vendors. This may result in penalty from vendors or further reassessment on tightening the credit terms in the future.

    Similarly, there is also possible risk on missing the accruals. There is a risk of possible fraud both internal among internal staff and external parties where collusion happen between staff and vendors. In addition, there are also control deficiencies that auditor should assess and detect.

    The control deficiencies give rise to the possible fraud as well as other problems that result in the misstatement of accounts payable recorded and presented in the Balance Sheet. Below are the examples of control deficiencies that we commonly encounter during the course of the audit: There is no proper segregation of duties between the person to approve the purchases, record invoices into system as well as the person who make the payment.

    In addition, the person who perform the reconciliation on accounts payable is also not segregated. There is no properly review from other person before processing the payment. There might be only one person to process the electronic payment or transfer TT. This raise doubt of internal control deficiencies. READ: Types of Assurance Engagement: All You Need to Know The above problems both on risk and control deficiencies are they key areas that shall need to take into account and perform the relevant audit procedures for the audit of the accounts payable.

    In the later section of this article, we will cover the key assertions as well as the audit procedures for the audit of accounts payable. Key Assertions of Accounts Payable Audit As mentioned above, the audit on accounts payable is very important as it is the key and material items in the financial statements.

    In order to audit the accounts payable, it requires to use the combination of analytical procedures and tests of detail or substantive audit procedures for accounts payable. Typically, we perform the audit of accounts payable in conjunction with the audit of purchases. Thus, in this section, we will take some assertions that we usually test in combination with accounts payable. Below are the key audit assertions for accounts payable and we will group these assertions into 3 main types: Financial Statements Assertions Audit Objectives in Relation to the Assertions Assertion about classes of transactions Occurrence: This is to ensure that all purchase transactions are actually incurred and related to the entity.

    Completeness: This is to ensure that the accounts payable balance reported on the balance sheet includes all payable transactions occurring during the period. Accuracy: This is to ensure that all purchase transactions have been appropriately recorded at the correct amount.

    Cut-Off: This is to ensure that all transactions have been recorded in the correct accounting period. Classification: Auditors need to check if payable balances are properly classified in subclasses and debits and credits are accurately applied. Assertions about the account balance as at the year-end Existence: The existence assertion means that the accounts payable balance recognized in the financial statements actually exists at the reporting date.

    Rights and Obligations: The rights and obligations assertion means that the company actually owes a liability for accounts payable at the reporting date. Completeness: This is to ensure that the accounts payable reported on the Balance Sheet includes all accounts payable transactions occurring during the period.

    Valuation and Allocation: The valuation assertion is ensuring the amount is correctly recorded. Assertions about presentation and disclosure The combination of Occurrence, Rights and Obligations: For all these assertions, we want to ensure that the entity being audited has properly disclosed all events and transactions relating to the accounts payable and those have actually incurred and pertain to the entity.

    Completeness: This is to ensure that the entity has included all required disclosures. Classification and Understandability: This is to ensure that all accounts payable are properly presented and all required disclosures have been clearly expressed.

    Accuracy and Valuation: This is to ensure that all financial and other information have been disclosed fairly at the appropriate amounts. Key Audit Procedures for Accounts Payable Audit In order to easily understand about each types of audit procedure, we will group all those audit procedures into 9 categories as below: Please note that in one audit procedure is able to ensure one or more audit assertions.

    Thus, you might see the same audit procedure for each group of assertions in this section. Completeness Under this section, the auditor perform the audit procedures to ensure and confirm completeness of the accounts payable.

    Below are the audit procedures that audit may carries out to ensure this assertion. The total balance for vendors can be obtained from the general ledger and can be compared the total balances from the listing to check actual balance has been recorded in the ledger. For a sample of vendors they should inspect documentation to ensure correct figures are posted in the system. If there is a mismatch between the balance confirmed by the vendor and the balance recorded in the accounts payable ledger, the audit team will need to inquire about the reason.

    They will perform tests for unrecorded liabilities by examining year-end transactions and unrecorded invoices. Perform the analytical procedures to compare the balance of accounts payable of current year to previously. In addition, auditor also may compare the balance owned to each selected individual suppliers of current year to prior years as well. Perform the analytical procedures to compare the accounts payable turnover as well as accounts payable days sometimes called average accounts payable payment period to previous years or to any industry data.

    Existence Under this section, the auditor perform the audit procedures to ensure and confirm Existence of the accounts payable. Confirm the reasonableness of accounts payable by performing the analytical procedures to compare the current year balances of accounts payable to previous year balances.

    Similarly, auditor shall calculate the accounts payable turnover of current year to previous years to confirm the reasonableness of such ratio. Obtain the confirmation of accounts payable to confirm the existing of accounts payable. READ: Audit Procedures for Inventory Rights and Obligations Under this section, the auditor perform the audit procedures to ensure and confirm rights and obligations of the accounts payable.

    They should vouch a transaction from inception to completion by reviewing original source documents like purchase orders, vendor invoices, journal entries and bank records. Valuation and Allocation Under this section, the auditor perform the audit procedures to ensure and confirm Valuation of the accounts payable. The auditor should compare the accounts payable balance of current year to previous years. In addition, they should also compare the selected individual amount owed in the accounts payable listing for current year to previous years as well.

    This is the same audit procedure to ensure the completeness assertion as described in the above. Cut-Off Under this section, the auditor perform the audit procedures to ensure and confirm cut-off of the accounts payable. The auditor should select sample of vouchers and verify the date on the vouchers to ensure that the transactions have recorded in the correct period.

    Particularly, the selection of transactions around the year-end and at the beginning of the following year. Then determine to ensure that those transactions were recorded in the correct period. Accuracy Under this section, the auditor perform the audit procedures to ensure and confirm accuracy of the accounts payable. The auditor should review the SOPs in detail and test a sample of transactions to identify that payables personnel follow them.

    This is normally to ensure that there is no risk regarding fraud or any inaccuracy of the accounts payable transactions. Occurrence Under this section, the auditor perform the audit procedures to ensure and confirm occurrence of the accounts payable. Select sample of invoices and vouchers and then perform the inspection to see if there is proper authorization. Classification and Understandability Under this section, the auditor perform the audit procedures to ensure and confirm classification and understandability of the accounts payable.

    The auditors should perform the review the accounts payable listing and then identify if there is any large amount at debit side. If that is the case, it should be reclassified as receivables or deposits depend on its nature. In addition, they should also review to see if there is properly separate disclosure for long-term where it should be.

    Accuracy and Valuation Under this section, the auditor perform the audit procedures to ensure and confirm accuracy and valuation which is part of the presentation and disclosure assertion of the accounts payable. This is to ensure the accounts payable balance is properly disclosed in the financial statements. In addition, the auditor should also ensure the financial information is accurate and properly presented at the correct amount.

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    The control deficiencies give rise to the possible fraud as well as other problems that result in the misstatement of accounts payable recorded and presented in the Balance Sheet.

    Below are the examples of control deficiencies that we commonly encounter during the course of the audit: There is no proper segregation of duties between the person to approve the purchases, record invoices into system as well as the person who make the payment.

    In addition, the person who perform the reconciliation on accounts payable is also not segregated. There is no properly review from other person before processing the payment. There might be only one person to process the electronic payment or transfer TT. This raise doubt of internal control deficiencies.

    Auditing Accounts Payable and Expenses: A Guide

    READ: Types of Assurance Engagement: All You Need to Know The above problems both on risk and control deficiencies are they key areas that shall need to take into account and perform the relevant audit procedures for the audit of the accounts payable. In the later section of this article, we will cover the key assertions as well as the audit procedures for the audit of accounts payable. Key Assertions of Accounts Payable Audit As mentioned above, the audit on accounts payable is very important as it is the key and material items in the financial statements.

    In order to audit the accounts payable, it requires to use the combination of analytical procedures and tests of detail or substantive audit procedures for accounts payable. Typically, we perform the audit of accounts payable in conjunction with the audit of purchases. Thus, in this section, we will take some assertions that we usually test in combination with accounts payable. Below are the key audit assertions for accounts payable and we will group these assertions into 3 main types: Financial Statements Assertions Audit Objectives in Relation to the Assertions Assertion about classes of transactions Occurrence: This is to ensure that all purchase transactions are actually incurred and related to the entity.

    Completeness: This is to ensure that the accounts payable balance reported on the balance sheet includes all payable transactions occurring during the period. Accuracy: This is to ensure that all purchase transactions have been appropriately recorded at the correct amount. Cut-Off: This is to ensure that all transactions have been recorded in the correct accounting period. Classification: Auditors need to check if payable balances are properly classified in subclasses and debits and credits are accurately applied.

    Assertions about the account balance as at the year-end Existence: The existence assertion means that the accounts payable balance recognized in the financial statements actually exists at the reporting date. Rights and Obligations: The rights and obligations assertion means that the company actually owes a liability for accounts payable at the reporting date.

    Completeness: This is to ensure that the accounts payable reported on the Balance Sheet includes all accounts payable transactions occurring during the period.

    The Complete Guide to Accounts Payable (AP) Audits

    Valuation and Allocation: The valuation assertion is ensuring the amount is correctly recorded. Assertions about presentation and disclosure The combination of Occurrence, Rights and Obligations: For all these assertions, we want to ensure that the entity being audited has properly disclosed all events and transactions relating to the accounts payable and those have actually incurred and pertain to the entity. Completeness: This is to ensure that the entity has included all required disclosures.

    Classification and Understandability: This is to ensure that all accounts payable are properly presented and all required disclosures have been clearly expressed.

    Accuracy and Valuation: This is to ensure that all financial and other information have been disclosed fairly at the appropriate amounts. Key Audit Procedures for Accounts Payable Audit In order to easily understand about each types of audit procedure, we will group all those audit procedures into 9 categories as below: Please note that in one audit procedure is able to ensure one or more audit assertions.

    Thus, you might see the same audit procedure for each group of assertions in this section. Completeness Under this section, the auditor perform the audit procedures to ensure and confirm completeness of the accounts payable.

    Below are the audit procedures that audit may carries out to ensure this assertion.

    Audit Procedures for Accounts Payable – Risks and Assertions Included

    The total balance for vendors can be obtained from the general ledger and can be compared the total balances from the listing to check actual balance has been recorded in the ledger. For a sample of vendors they should inspect documentation to ensure correct figures are posted in the system. If there is a mismatch between the balance confirmed by the vendor and the balance recorded in the accounts payable ledger, the audit team will need to inquire about the reason. They will perform tests for unrecorded liabilities by examining year-end transactions and unrecorded invoices.

    Perform the analytical procedures to compare the balance of accounts payable of current year to previously. In addition, auditor also may compare the balance owned to each selected individual suppliers of current year to prior years as well.

    What Are Audit Assertions and Why They Are Important

    Perform the analytical procedures to compare the accounts payable turnover as well as accounts payable days sometimes called average accounts payable payment period to previous years or to any industry data.

    Existence Under this section, the auditor perform the audit procedures to ensure and confirm Existence of the accounts payable. Verifying special exceptions applied to various classes of transactions e. When confirming completeness, auditors verify that this is the case. Examples include: Verifying all salaries and wages are fully recorded in the proper accounts and correct accounting period.

    Comparing inventory levels to sales data to confirm all inventory is properly recorded at period end. Examining bank statements to verify all deposits made have been properly recorded. Cut-Off As with completeness, auditors use cut-off to determine transactions are recorded within the proper accounting period. Cut-off has special significance when reviewing payroll and inventory levels.

    Examples include: Confirming salaries and wages recorded during the current accounting period are related to the same period. Verifying accrued or prepaid expenses are recorded in the correct period.

    Tracing receiving documentation and shipping documentation to purchases and sales respectively to verify purchases and sales are recorded within the proper fiscal year. Existence This assertion confirms the liabilities, assets, and equity balances recorded in a financial statement actually you guessed it exist. The auditor is required to collect whatever evidence is necessary to establish a connection between the values on the document and their real world counterparts.

    Examples include: Confirming inventory recorded on a balance sheet physically exists at period end. Verifying accounts receivable balances by reviewing all activity related to a given customer.

    Examining bank records to confirm recorded transactions and account balances, verify cash flow reports, etc. Occurrence Similar to existence, occurrence is used to verify that recorded transactions have actually occurred.

    Examples include: Cross-checking accounts receivable balances with sales records to confirm a sale happened on the date listed.


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