1. Acquisitions and Payments
Accounts Payable

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
Set materiality.
Assess Audit Risk and Inherent Risk for A/P
Assess Control Risk for Accounts Payable
Identify assertions where substantive testing is insufficient, and/or there is risk of material misstatement
Design and perform test of control. Assess control risk
Design and perform substantive tests. Includes test of details and analytical procedures
The type of audit procedures?
What is the sample size?
Items to be selected?
Timing – when to do the procedures?

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-9J per George Winters

6. 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

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

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

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

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

11. Classification Accounts payable in the listing are properly classified
Scanning

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

13. 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.

14. CHEQUE REGISTER OKRA DEVELOPMENT CORP. 867 Faragut Sales, Inc.
8924 Bailey Road, Salem, OR 92117
867
Sept. 4, 201X
Pay to the order of
Faragut Sales, Inc.
$474.40
Four hundred and seventy 40/
Dollars
Dewey Lee
THE BANK
of OREGON
Treasurer
Page 292
CHEQUE REGISTER
Voucher
Vouchers
Purchase
Cash
Payee
Cheque No.
No.
Date
Payable Dr.
Discounts Cr Cr
Faragut Sales, Inc
867
Sept. 4, 201X
480.00
9.60
470.40

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

16. 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

17. The Nature of Capital Assets
Typically capital assets are used in manufacturing
Operational use and normal life of greater than one year

18. Tracking Capital Assets
Large organizations
The source of information for
Small organizations may have a manual listing of such assets

19. Audit Emphasis for Manufacturing Asset Additions
Emphasis is on auditing
For tax purposes
Amortization and accumulated amortization

20. Categories of Audit Tests for Capital Assets
Audit emphasis is the verification of:
Current-year acquisitions
Current-year disposals
The ending balance in the asset account
Amortization expense
The ending balance in accumulated amortization
For tax purposes

21. Analytical Procedures for Capital Assets
Compare amortization expense divided by gross manufacturing equipment cost with previous years
Compare accumulated amortization divided by gross manufacturing equipment cost with previous years
Compare monthly or annual repairs and maintenance, supplies expense, small tools expense, and similar accounts with previous years
Compare gross manufacturing cost divided by some measure of production with previous years

22. Verification of Asset Balances
Relevant internal controls over existing assets
Audit tests
Agree last years ending balances
How about asset additions and disposals?

23. Verification of Current Year Acquisitions
Important because
Starting point is normally a continuity schedule prepared by the client
An important technique is examination of

24. Verification of Current Year Disposals
The most important internal control over disposals is the existence of a formal method to inform management
The most important audit procedures are
Vouch disposal to

25. Verification of Amortization Expense and Accumulated Amortization
Primary audit objectives involve determining whether the client is:
Accumulated Amortization
Debits are normally tested as a part of
Credits are verified as part of

26. Audit of Prepaid Expenses
Prepaid expenses arise from the concept of matching expenses with revenues
Prepaid insurance is a common expense
Look at the file of insurance policies in force

27. Question 16-11, page 529
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.

28. Problem 16-21, Page 530
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
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.
What should the auditor use as a sampling unit in performing tests of acquisitions?
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?
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.
List the audit procedures that should be performed in the year-end audit of accounts payable to meet the cutoff objective.
State your opinion as to whether it is possible to conduct an adequate audit in these circumstances.

29. Problem 16-22, p. 531
You were in the final stages of your examination of the financial statements of Ozine corporation for the year ended December 31, 2011, when the corporation’s president came to talk to you. He believed that there was no point to your examining the 2012 acquisitions data files and testing data in support of 2012 entries. He stated that (1) bills pertaining to 2011 that were received too late to be included in the December acquisitions data files were recorded by the corporation as of the year end by journal entry, (2) the internal auditor made tests after the year end, and (3) he would furnish you with a letter confirming that here were no unrecorded liabilities.
REQUIRED
Should a public accountant’s test for unrecorded liabilities be affected by the fact that the client made a journal entry to record 2011 bills that were received late? Explain.
Should a public accountant’s test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official confirms that, to the best of his or her knowledge, all liabilities have been recorded? Explain.
Should a public accountant’s test for unrecorded liabilities be eliminated or reduced because of the internal audit tests? Explain.
Assume that the corporation, which handled some government contracts, had no internal auditor but that the Auditor General’s office spent three weeks auditing the records and was just completing her work at this time. How would the public accountant’s unrecorded liability test be affected by the work of the auditor from the Auditor General's office?
What sources in addition to the 2011 acquisitions data files should the public accountant consider to locate possible unrecorded liabilities?