1. Accounts Payable and Other Liabilities Chapter 14

2. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-2 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

3. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-3 Acquisition Cycle--Documents Purchase order Receiving report Vendor’s invoice Vendor’s statement

4. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-4

5. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-5 Objectives for the Audit Accounts Payable and Purchases Consider inherent risks, including fraud risks Consider internal control over accounts payables and purchases Substantiate the existence of recorded accounts payable and occurrence of purchases Establish the completeness of accounts payable and purchase transactions Determine that the client has obligations to pay the recorded accounts payable Determine that the valuation of accounts payable is in accordance with GAAP Determine that the presentation and disclosure of accounts payable and purchases are appropriate

6. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-6

7. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-7 Substantive Tests of Accounts Payable

8. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-8 Contrasting Confirmation of Accounts Payable and Accounts Receivable Accounts PayableAccounts 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) etc.) Confirmation Generally No Yes Required?

9. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-9