Accounts Payable

1. Accounts Payable CAS 500 – Audit evidence CAS 505 – External confirmations CAS 530 – Audit sampling CAS 520 – Analytical procedures

2. Accounts Payable – Substantive Testing • What are accounts payable? • Acquisition and payments are • Both the ending liability and the transactions often involve

3. Designing Tests of Details of Balances of Accounts Payable Must consider IR for A/P. Materiality for A/P is allocated from planning materiality. Probably want a low audit risk for A/P as it is usually material. E.g. 5% Set materiality. Assess Audit Risk and Inherent Risk for A/P Use last years assessed CR. If not available, estimate based on initial system review and discussions with client. Will eventually use the assessed materiality after testing. Assess Control Risk for Accounts Payable Some parts of an audit may require additional substantive testing beyond was is normal. This could be due to increased chance of material misstatement or due to the significance of the item, E.G. intercompany A/P. i.e. Related party T/A Identify assertions where substantive testing is insufficient, and/or there is risk of material misstatement e.g. Confirmations vs. Subsequent payments? e.g. Sample size will be affected by reliance on internal controls e.g. Monetary unit sampling could be used to select the actual items e.g. Low CR, could do substantive testing early Design and perform test of control. Assess control risk Design test for those controls on which the auditor will rely. You cannot assess CR without testing The type of audit procedures? What is the sample size? Items to be selected? Timing – when to do the procedures? Design and perform substantive tests. Includes test of details and analytical procedures Tests of details can be reduced if CR is low. Analytical procedures are performed as additional persuasive evidence. Amount of testing is indirectly related to DR

4. Tests of Detail of Balance of Accounts Payables Existence Recorded acquisitions are for items that were acquired • Trace from the accounts payable listing • Confirm accounts payable • Scan voucher register • Examine underlying documents for authenticity and reasonableness

5. 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

6. Special Note: The Completeness Assertion When considering assertions and obtaining evidence about accounts payable and other liabilities auditors must put emphasis on the completeness and obligations assertions. • Why this emphasis? • Remember:

7. Completeness To ensure that existing accounts payable Search for unrecorded liabilities • Examine documents underlying vouchers subsequent to the B/S date • Examine the documents underlying invoices not yet recorded • Using the last receiving report number at the time of the inventory observation

8. Cutoff • To determine if the transactions are recorded in the correct period • Testing cutoff

9. Obligations • The client has an obligation to pay • Vendors’ statements • Confirmations

10. Accuracy • Acquisitions are recorded for the proper amounts • Can use the same procedures as those for existence

11. Detail tie-in • Accounts payable listing agrees with • Footing • Tracing the total

12. Classification • Accounts payable in the listing are properly classified • Scanning

13. Presentation and disclosure • Acquisitions are recorded to result in presentation according to GAAP • Review the financial statements

14. Analytical Procedures for Accounts Payable • Compare acquisition-related expense account balances with prior years. • Review list of accounts payable for unusual, non-vendor, and interest bearing payables. • Compare individual accounts payable with previous years. • Calculate ratios such as purchase divided by accounts payable, and accounts payable divided by current liabilities.

15. Tests of Details for Cash Payments • Examining documents underlying cash payments • What documents? • Existence of the documents provides evidence • Approvals of the documents • A paid cheque • Recalculation of the discount • Accuracy of posting to the accounts

17. Reconciling cash payments per book to cash payments per bank • Proof of cash • Usually performed when controls over recording cash are weak • Excellent evidence of completeness Bank reconciliation • Bank reconciliations • Receiving bank statements directly from the bank • Bank cutoff statements • Bank confirmation

18. Problem EP 12-9, Page 679 • Listed below is a selection of items from internal control questionnaire on payables. • Are invoices, receiving reports, and purchase orders reviewed by the cheque signer? • Are cheques dated in the cash payments journal with the date of the cheque? • Are the quantity and quality of goods received determined at the time of receipt by receiving personnel independent of the purchasing department? • Are suppliers’ invoices matched against purchase orders and receiving reports before a liability is recorded? • Required: • For each item: • Identify the control objective to which it applies. • Specify one test of controls audit procedure an auditor could use to determine whether the control was operating effectively. • Using your business experience, your logic, your imagination, or all three, give an example of an error or fraud that could occur if the control were absent or ineffective.

19. Problem: DC 12-3, Page 683 You were in the final stages of your examination of the financial statements of Ozine corporation for the year ended December 31, 20X2, when you were consulted by the corporation’s president. The president believes that there is no point to your examining the 20X3 accounts payable records and testing data in support of 20X3 entries. He stated that (1) bills pertaining to 20X2 that were received too late to be included in the December accounts payable were recorded as of the year end by the corporation by journal entry, (2) the internal auditor made tests after the year end, and (3) he would furnish you with a letter certifying that here were no unrecorded liabilities. Required: Should your procedures for unrecorded liabilities be affected by the fact that the auditee made a journal entry to record 20X2 bills that were received late? Explain. Should your test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official certifies that to the best of his knowledge all liabilities have been recorded? Explain. Should your test for unrecorded liabilities be eliminated or reduced because of the internal audit work? Explain. What sources in addition to the 20X3 accounts payable records should you consider to locate possible unrecorded liabilities?

20. Problem 2 – From another Text: • 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.

21. Problem DC 12-4 Page 683 • Accounts Payable Confirmations: • Clark and his partner, Kent, both Pas, are planning their audit program for the audit of accounts payable on the LeClair Corporation’s annual audit. Saturday afternoon, they reviewed the thick file of last year’s working papers, and both of them remembered all to well the six days they spent on last years accounts payable. • Last year, Clark had suggested that they email confirmations to 100 of LeClair’s suppliers. The company regularly purchased from about 1,000 suppliers, and these account payable balances fluctuate widely, depending on the volume of purchases and the terms LeClair’s purchasing agent is able to negotiate. Clark’s sample of 100 was designed to include accounts with large balances. In fact, the 100 accounts confirmed last year covered 80% of the total accounts payable. • Both Clark and Kent spent many hours tracking down minor differences reported in confirmation responses. Non-responding accounts were investigated by comparing LeClair’s balance with monthly statements received from suppliers. Ultimately, they determined that the accounts payable balance was not materially misstated. • Required: • Identify the accounts payable audit objectives that the auditors must consider in determining the audit procedures to be performed. • Identify situations when the auditors should use accounts payable confirmations, and discuss whether they are required to use them. • Discuss why the use of large dollar balances as the basis for selecting accounts payable for confirmation may not be the most efficient approach, and indicate a more efficient sample selection procedure that could be followed when choosing accounts payable for confirmation.