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Accounts Payable-2
Designing Tests of Details of Balances of Accounts
Payable
Must consider IR for A/P.
Set materiality. Materiality for A/P is allocated from planning
Assess Audit Risk and Inherent
Risk for A/P materiality. Probably want a low audit risk for
A/P as it is usually material. E.g. 5%
Accounts Payable-3
Tests of Detail of Balance of Accounts Payables
Existence
Accounts Payable-4
Best Company
522 Spring Hope Drive
Somewhere, Ontario
L2T-7Y6
January 7, 201Y
Hunter Company
322 Vernon Road
Elsewhere, Ontario
L2R-3W4
Our auditors, Sell &Ross LLP, are conducting an audit of out financial statements. For this purpose, please furnish directly to
them, at their address noted below, the following information as of December 31, 201X.
(1) Itemized statements of our accounts payable to you showing all unpaid items;
(2) A complete list of any notes and acceptances payable to you (including any which have been discounted)
showing the original date, dates due, original amount, unpaid balances, collateral and endorsers; and
(3) An itemized list of your merchandise consigned to us.
Your prompt attention to this request will be appreciated. A stamped, addressed envelope is enclosed for your reply.
Yours truly
George Winters
Sell & Ross LLP
Chartered Accountants
841 Main Street
Our Town, Ontario Best Company
L2S-9J1 per George Winters
Accounts Payable-5
Completeness
To ensure that existing accounts payable
Accounts Payable-7
Obligations
• The client has an obligation to pay
1. Vendors’ statements
2. Confirmations
Accounts Payable-8
Accuracy
• Acquisitions are recorded for the proper
amounts
Accounts Payable-9
Detail tie-in
• Accounts payable listing agrees with
1. Footing
Accounts Payable-10
Classification
• Accounts payable in the listing are properly
classified
1. Scanning
Accounts Payable-11
Presentation and disclosure
• Acquisitions are recorded to result in
presentation according to GAAP
Accounts Payable-12
Analytical Procedures for Accounts Payable
Accounts Payable-13
OKRA DEVELOPMENT CORP. 867
8924 Bailey Road, Salem, OR 92117
Sept. 4, 201X
Pay to the
order of Faragut Sales, Inc. $474.40
Cheque
Payee No. Date Payable Dr. Discounts Cr Cr
No.
Faragut Sales, Inc 867 9-00018 Sept. 4, 201X 480.00 9.60 470.40
Accounts Payable-14
Tests of Details for Cash Payments
• What documents?
• A paid cheque
Accounts Payable-15
2. Reconciling cash payments per book to cash payments per bank
• Proof of cash
3. Bank reconciliation
• Bank reconciliations
• Bank confirmation
Accounts Payable-16
The Nature of Capital Assets
Accounts Payable-17
Tracking Capital Assets
• Large organizations
Accounts Payable-18
Audit Emphasis for Manufacturing Asset Additions
• Emphasis is on auditing
Accounts Payable-19
Categories of Audit Tests for Capital Assets
– Current-year disposals
– Amortization expense
Accounts Payable-20
Analytical Procedures for Capital Assets
Accounts Payable-21
Verification of Asset Balances
• Audit tests
• Agree last years ending balances
Accounts Payable-22
Verification of Current Year Acquisitions
• Important because
Accounts Payable-23
Verification of Current Year Disposals
• Vouch disposal to
Accounts Payable-24
Verification of Amortization Expense and
Accumulated Amortization
• Amortization Expense
• Primary audit objectives involve determining whether the
client is:
• Accumulated Amortization
• Debits are normally tested as a part of
Accounts Payable-25
Audit of Prepaid Expenses
Accounts Payable-26
Question 13-11, page 455
• Explain why it is common for auditors to send confirmation
requests to vendors with “zero balances” on the client’s
accounts payable listing but uncommon to follow the same
approach in verifying accounts receivable.
Accounts Payable-27
Problem 13-28, Page 458
Because of the small size of the company and the limited number of accounting personnel, Dry Goods Wholesale Company Ltd.
initially records all acquisitions of goods and services at the time that cash disbursements are made. At the end of each quarter
when financial statements for internal purposes are prepared, accounts payable are recorded by adjusting journal entries. The
entries are reversed at the beginning of the subsequent period. Except for the lack of a purchasing system, the controls over
acquisitions are excellent for a small company. (There are adequate prenumbered documents for all receipt of goods, proper
approvals, and adequate internal verification wherever possible.)
Before the auditor arrives for the year-end audit, the bookkeeper prepares adjusting entries to record the accounts payable as of
the balance sheet date. The aged trial balance is listed as of the year end, and a manual schedule is prepared adding amounts that
were entered in the following month. Thus, the accounts payable balance equals the aged trial balance plus the following month's
journal entry for invoices received after year end. All vendors’ invoices supporting the journal entry are retained in a separate file
for the auditor’s use.
In the current year, the accounts payable balance has increased dramatically because of a severe cash shortage. (The cash
shortage apparently arose from expansion of inventory and facilities rather than a lack of sales.) Many accounts have remain
unpaid for several months, and the client is getting pressure from several vendors to pay the bills. Since the company had a
relatively profitable year, management is anxious to complete the audit as early as possible so that the audited statements can be
used to obtain a larger bank. loan.
REQUIRED
a. Explain how the lack of a complete aged accounts payable trial balance will affect the auditor’s tests of controls for
acquisitions and cash disbursements.
b. What should the auditor use as a sampling unit in performing tests of acquisitions?
c. Assume that no misstatements are discovered in the auditor’s tests of controls for acquisitions and disbursements. How will
that assumption affect the verification of accounts payable?
d. Discuss the reasonableness of the client’s request for an early completion of the audit and the implications of the request from
the auditor’s point of view.
e. List the audit procedures that should be performed in the year-end audit of accounts payable to meet the cutoff objective.
f. State your opinion as to whether it is possible to conduct an adequate audit in these circumstances.