Chapter 6 Accounts payables and liabilities

Audit

1. Chapter 6
Accounts Payable and
Other Liabilities

2. Sources of Accounts PayableSources 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.
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3. Sources of Accrued LiabilitiesSources 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
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4. Objectives for the Audit Accounts Objectives for the Audit Accounts
Payable and PurchasesPayable 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
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5. Controls Controls
Over the Acquisition CycleOver 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
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6. Acquisition Cycle--Documents Acquisition Cycle--Documents
Purchase order
Receiving report
Vendor’s invoice
Vendor’s statement
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7. Accounts Payable Audit Steps Accounts Payable Audit Steps (1 of 4(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.
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8. Accounts Payable Audit Steps (Accounts Payable Audit Steps (2 of 4)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.
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9. Accounts Payable Audit Steps Accounts Payable Audit Steps (3 of 4)(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.
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10. Accounts Payable Audit Steps Accounts Payable Audit Steps (4 of 4)(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.
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11. Search for Unrecorded A/PSearch 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
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12. Potential Sources of Unrecorded A/PPotential 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
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13. Amounts withheld from employees’ payAmounts 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
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14. Sales Tax PayableSales 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
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15. Unclaimed wagesUnclaimed 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
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16. Customers’ DepositsCustomers’ 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
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17. Accrued Liabilities Accrued Liabilities (1 of 3)(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
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18. Accrued Liabilities Accrued Liabilities (2 of 3)(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.
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19. Accrued Liabilities Accrued Liabilities (3 of 3)(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
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