auditing the acquistion cycle · 2013. 8. 30. · 14-3 sources of accrued liabilities accrued...
TRANSCRIPT
Accounts Payable
and Other Liabilities
Chapter 14
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
14-2
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
Invoices and statements from suppliers usually
evidence accounts payable
Interest-bearing obligations are not included in
accounts payable; they are included as bonds,
notes, etc.
14-3
Sources of Accrued Liabilities
Accrued liabilities
Sometimes called accrued expenses
Examples: Salaries, interest, 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
14-4
Objectives for the Audit
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
14-5
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
14-6
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
14-7
Acquisition Cycle--Documents
Purchase order
Receiving report
Vendor’s invoice
Vendor’s statement
14-8
14-9
Audit Documentation
Working papers
Lead schedule for accounts payable
Trial balances of various types of accounts
payable
Confirmation requests for accounts payable
Listing of unrecorded accounts payable
14-10
14-11
Risks of Material Misstatement
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 employee reconciles subledger
to general ledger
14-12
Risks of Material Misstatement Risks 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 such as these indicate the need for
extensive substantive procedures
14-13
Accounts Payable Audit
Steps (1 of 4)
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.
14-14
Accounts Payable Audit
Steps (2 of 4)
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.
14-15
Accounts Payable Audit
Steps (3 of 4)
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.
14-16
Accounts Payable Audit
Steps (4 of 4)
E. Substantive procedures (continued) 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.
14-17
Summary of Substantive Tests of
Accounts Payable
14-18
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 receiving reports) and statements)
Confirmation
Generally No Yes
Required?
14-19
Search for 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
14-20
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
14-21
14-22
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
14-23
Amounts withheld from
employees’ pay Income taxes withheld from employees’
pay but not remitted as of balance sheet
date
Trace amounts withheld to payroll
summary sheets
Test computations of taxes withheld and
accrued
Determine that taxes have been deposited
in accordance with law
14-24
Sales Tax Payable
Required to collect sales tax imposed by
state and local governments
Not an expense, just collecting agent
Liabilities until remitted
Verify liability by reviewing tax return
Test reasonableness of amount
Test invoices for correct tax charge
14-25
Unclaimed wages
Subject to misappropriation
Concerned with adequacy of internal
control
Should not be left for more than a few day
Prompt deposit in special bank account
Analyze unclaimed wages to determine
Credit represents all unclaimed wages after
each payroll distribution
Debits represent authorized payments
14-25
14-26
Customers’ Deposits
Deposits on returnable containers or to
guarantee payment of bills
Review procedures followed in accepting
and returning deposits
Verify list of individual deposits and
compare to general ledger account
Generally do not confirm
14-27
Accrued Liabilities (1 of 3)
Obligations payable sometime during the succeeding
period for services or privileges received before balance
sheet date
Examples: Interest payable, accrued property taxes
Accounting estimates
Review and test management’s process of
developing the estimate
Review subsequent events
Independently develop estimate to compare
14-28
Accrued Liabilities (2 of 3)
Basic audit steps
1. Examine any contracts 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 computation 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.
14-29
Accrued Liabilities (3 of 3)
Accrued Property Taxes
Accrued Payrolls
Pension Plan Accruals
Postemployment Benefits other than Pensions
Accrued Vacation Pay
Product Warranty Liabilities
Accrued Commission and Bonuses
Income Tax Payable
Accrued Professional Fees
14-30
Presentation
Current liability
Accrued expenses
Deferred income tax for next year
Deferred credits for rent
Deposits on contracts
Long-term liability
Deferred income tax - noncurrent
14-31
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
Amounts withheld from employees’ pay