Purchase Cycle

Sources of Accounts Payable
• Short-term obligations arising from purchase of goods

and services in ordinary course of business; examples:
• Acquisition of merchandise on credit
• Receipt of services such as advertising, repairs, etc.
• Invoices and statements from suppliers usually
evidence of the amount of accounts payable
• Interest-bearing obligations are not included in
accounts payable; they are included as bonds, notes,
etc.
Sources of Accrued Liabilities
• Accrued liabilities
• Sometimes called accrued expenses
• Examples: Salaries, interest, and rent
• Accumulate over time and management must make
accounting estimate at year-end
• Note 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
Objectives for the Audit of Accounts Payable and
Purchases
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 accounts payable.
3. Assess the risks of material misstatement and design tests of controls and
substantive procedures that:
a. Substantiate the existence of accounts payable and the client’s obligation to pay these
liabilities and establish the occurrence of purchase transactions
b. Establish the completeness of recorded accounts payable
c. Verify the cutoff of transactions affecting accounts payable
d. Establish the proper valuation of accounts payable and the accuracy of purchase
transactions
e. Determine that the presentation and disclosure of accounts payable are appropriate
Primary Concern in Audit of Liabilities
• 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 vendors’ statements to accounts
• Reconciliation of bank accounts
• Use of budgets and analysis of variances
• Use of chart of accounts and review of account coding
Assessing Risks of Material
Misstatement
A. Use the understanding of the client and its
environment to consider inherent risks,
including fraud risks, related to accounts payable.
B. Obtain an understanding of internal control over
accounts payable.
C. Assess the risks of material misstatement and design
further audit procedures.
©McGraw-Hill Education.
Indications of Risks of Misstatement
• Subsidiary records not in agreement with general
ledger
• Receiving reports and vouchers used haphazardly
• Purchase transactions not recorded until payment
is made
• Many accounts payable long past due
• Risks such as these indicate the need for
additional substantive procedures
Additional Tests of Controls
D. Perform further audit procedures—tests of
controls.
1. Examples of tests of controls.
a. Verify a sample of postings to the accounts payable control
account.
b. Vouch to supporting documents a sample of postings in
selected accounts of the accounts payable subsidiary ledger.
c. Test IT application controls.
d. If necessary, revise the risks of material misstatement based on
the results of tests of controls.
Substantive Procedures for Accounts
Payable
E. Perform further audit procedures—substantive procedures for
accounts payable.
1. Obtain or prepare a trial balance of accounts payable as of the
balance sheet date and reconcile with the general ledger.
2. Vouch balances payable to selected creditors by inspection of
supporting documents.
3. Reconcile liabilities with monthly statements from creditors.
4. Confirm accounts payable by direct correspondence with
vendors.
5.Perform analytical procedures for accounts payable and related
accounts.
6. Search for unrecorded accounts payable.
7. Perform procedures to identify accounts payable to related
parties.
8. Evaluate proper balance sheet presentation and disclosure of
accounts payable.
Summary of Substantive Tests of Accounts Payable
Figure 14.2
Contrasting Confirmation of Accounts Payable and
Accounts Receivable
Accounts Payable Accounts Receivable
Primary Audit Completeness Existence

Objective
Other Evidence External evidence Internal evidence

Available held by client (i.e.., (i.e., sales invoices,
vendors’ invoices shipping documents)
and statements)
Confirmation
Generally No Yes
Required?
Search for Unrecorded Accounts Payable
• Be alert during reconciliations, confirmations and
analytical procedures for unrecorded liabilities
• Examine transactions recorded following year-end
• Compare cash payments after year-end to accounts
payable trial balance
• Examine cash disbursements over specific dollar
amounts during subsequent period
Potential Sources of Unrecorded Accounts
Payable
• 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

Purchase Cycle

Uploaded by

Copyright:

Available Formats

Purchase Cycle

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Purchase Cycle

Uploaded by

Copyright:

Available Formats

Sources of Accounts Payable

• Short-term obligations arising from purchase of goods

• Possibility of understatement or omission of liabilities

• Segregation of duties—purchases and disbursements

Accounts Payable Accounts Receivable

Primary Audit Completeness Existence

Other Evidence External evidence Internal evidence

You might also like