Slide © The McGraw-Hill Companies, Inc., 2006 Accounts Payable and Other Liabilities l Besides Accts Payable: FAccrued Liabilities FMisc. S/T Liabilities

Slide © The McGraw-Hill Companies, Inc., 2006 Controls Over the Acquisition Cycle l Segregation of duties--purchases and disbursements l Approval of purchase orders l Numerical control of purchase orders and receiving reports l Matching of details of vendors’ invoices to purchase orders and receiving documents l Approval of vendors’ invoices l Pre-numbered checks l Reconciliation of details of individual disbursements to controlling accounts l Reconciliation of vendors’ statements to accounts l Reconciliation of bank accounts l Use of budgets and analysis of variances l Use of chart of accounts and review of account coding

Slide © The McGraw-Hill Companies, Inc., 2006 Acquisition Cycle Documents Client Purchase Order Client Receiving Report Vendor Invoice Vendor Monthly Statement Client Check Disbursement

Slide © The McGraw-Hill Companies, Inc., 2006 Most Likely Misstatements Accounts Payable and Related Accounts l Incorrect recording- purchase/disbursement l Misappropriation of purchases l Embezzlement (disbursement or purchase) l Duplicate payments for purchases l Unrecorded disbursements l Out-of-Period recording of purchases or disbursements l Failure to accrue liabilities

Slide © The McGraw-Hill Companies, Inc., 2006 Objectives of Substantive Tests of Accounts Payable and Purchases l Substantiate the Existence of recorded accounts payable and occurrence of purchases l Establish the Completeness of accounts payable and purchase transactions l Determine that the client has Obligations(Right) to pay the recorded accounts payable l Establish the clerical accuracy of records and supporting schedules l Determine that the Valuation of accounts payable is in accordance with GAAP l Determine that the Presentation and disclosure of accounts payable and purchases are appropriate

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements l Confirm accounts payable

Slide © The McGraw-Hill Companies, Inc., 2006 Contrasting Confirmation of Accounts Payable and Accounts Receivable Accounts Payable Accounts Receivable Primary Audit Completeness Existence Objective Other Evidence Available Confirmation Generally Required?

Slide © The McGraw-Hill Companies, Inc., 2006 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) vendor invoices Little external evidence and statements) Confirmation Generally Required?

Slide © The McGraw-Hill Companies, Inc., 2006 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, vendor invoices receiving reports, and statements) etc.) Confirmation Generally Required? NOYES

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements l Confirm accounts payable l Perform analytical procedures

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements l Confirm accounts payable l Perform analytical procedures l Perform search for unrecorded liabilities

Slide © The McGraw-Hill Companies, Inc., 2006 The Big Search l This is the KEY substantive test for A/P l Be alert throughout the audit (esp, in audit of cash, inventories, capital leases) l Specific Steps: 1.Review cash disbursements for 1 to 2 weeks after B.S. date 2.Identify unmatched P.O.s, receiving reports, invoices around year-end 3.Review invoices rec’d shortly after year-end

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements l Confirm accounts payable l Perform analytical procedures l Perform search for unrecorded liabilities l Evaluate other current liabilities

Slide © The McGraw-Hill Companies, Inc., 2006 Other (Accrued) Liabilities l Payroll Liabilities l Commissions l Employee Bonuses l Deferred Compensation l Income Tax Payable l Property Taxes l Pension Liabilities l Postretirement Benefits l Employee Vacation l Warranty Liabilities l Customer Deposits l Sales Tax Payable

Slide © The McGraw-Hill Companies, Inc., 2006 Other (Accrued) Liabilities Key Audit Approach l Identify missing ones by asking client, looking at recorded expenses for ones that should have accruals and brainstorm ones that should be there l Then, evaluate computations like any accounting estimate. Consider asking for Help from specialists.

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements l Confirm accounts payable l Perform analytical procedures l Perform search for unrecorded liabilities l Evaluate other current liabilities l Identify related party payables

Slide © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of Accounts Payable and Related Accounts l Obtain trial balance of accounts payable and reconcile with the ledgers l Vouch balances payable to selected vendor invoices l Reconcile recorded liabilities with vendors’ statements l Confirm accounts payable l Perform analytical procedures l Perform search for unrecorded liabilities l Evaluate other current liabilities l Identify related party payables l Evaluate financial statement presentation and disclosure