Which of the following audit procedures is best for identifying unrecorded trade accounts payable? Show
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A search for unrecorded liabilities is a fundamental, almost universally applied procedure in all audits. The scope of such a search frequently includes a sampling of subsequent cash disbursements, which is an example of testing one population for understatement by sampling through a “reciprocal” population where unrecorded or otherwise missing balances or transactions are likely to reside. Unfortunately, in practice one often finds auditors sampling through subsequent disbursements without regard for as-yet unpaid purchase or expense invoices that have been entered post–balance sheet into a payables system (i.e., through a payables or purchases journal or voucher register) or that have not yet been entered into any system and are sitting on someone’s desk. Accordingly, auditors must understand the business’s method and timeliness (in relation to cutting checks) of recording payables and be cognizant of, and address, these risks. Nội dung chính
When there is a longer-than-usual time interval between recording payables and cutting the checks—a common circumstance with financially troubled entities or during periods of economic stress—an auditor should consider merging the populations from the post–balance sheet payables journal (or whatever it is called) and the disbursements journal and eliminate duplicates before sampling (IDEA or Excel software should be able to do this easily). Lastly, auditors should consider whether the client has an unentered invoice file that needs to be examined for possible underaccruals. If the business does not maintain physical control of the unentered invoices, then extended audit procedures such as payables confirmations are probably warranted. One certainly should not wait until near the end of the audit to make that decision. In certain circumstances, an alternative to sampling for searching for unrecorded liabilities might be more appropriate, such as when there are relatively few large vendors that account for a substantial portion of the year’s purchases and the year-end accounts payable. In such a case, a more effective and efficient audit procedure might be auditing reconciliations of recorded payables to vendors’ statements or confirmations. When the risk of unrecorded liabilities is not significant, a properly designed substantive analytical test might adequately reduce the risk of undetected material understatement of recorded payables. When the combined risk of material mis-statement from unrecorded liabilities is assessed as low, scanning the population for unusual items in lieu of sampling might sometimes provide sufficient audit comfort. Caution should be exercised, however, to ensure that this process is assigned to a member of the audit team with sufficient experience, judgment, and knowledge of the client to identify what is unusual. Many auditors have long believed that, whatever the selected procedure, a search for unrecorded liabilities should invariably be performed on a population that extends through the last day in the field (i.e., the report date). Under the principles of risk-based auditing, however, it is generally inefficient, and therefore unnecessary, to do so; rather, one should define the risk period during which unrecorded liabilities are likely to appear. Perhaps a more serious consequence of choosing a post–balance sheet test period that extends too far beyond the risk period is that it will cause any projected error to be overstated and unreliable. This is particularly true when findings (exceptions) are concentrated in the early part of the test period, which is normally expected to be the case except in the weakest of control environments. The appropriate length of such a period should ordinarily depend on an auditor’s risk assessment, based on the client’s observed pattern of recording payables or making payments and current financial health under prevalent economic conditions. Auditors should be cognizant that such conditions may likely have slowed down the client’s cash flows so that 1) the client’s staff may have been reduced or 2) for reasons of slow cash inflow, payables are processed and paid slower than in the past. Accordingly, during periods of economic stress, an auditor should consider for certain clients whether the “risk period” for defining the population for sampling should be lengthened from what it may have been in the past for certain clients. Howard B. Levy, CPA is a principal and director of technical services at Piercy Bowler Taylor & Kern, Las Vegas, Nev., and an independent technical consultant to other professionals. He is a former member of the AICPA’s Auditing Standards Board and its Accounting Standards Executive Committee, and a current member of its Center for Audit Quality’s Smaller Firms Task Force. He is a member of The CPA Journal Editorial Advisory Board. Accounts payable is usually one of the more important audit areas. Why? Risk. First, it’s easy to increase net income by not recording period-end payables. Second, many forms of theft occur in the accounts payable area. In this post, I’ll answer questions such as, “how should we test accounts payable?” And “should I perform fraud-related expense procedures?” We’ll also take a look at common payables-related risks and how to respond to them. In short, you will learn what you need to know about auditing accounts payable. Auditing Accounts Payable and Expenses — An OverviewWhat is a payable? It’s the amount a company owes for services rendered or goods received. Suppose the company you are auditing receives $2,000 in legal services in the last week of December 2019, but the law firm sends the related invoice in January 2020. The company owes $2,000 as of December 31, 2019. The services were provided, but the payment was not made until after the year-end. Consequently, the company should accrue (record) the $2,000 as payable at year-end. In determining whether payables exist, I like to ask, “if the company closed down at midnight on the last day of the year, would it have a legal obligation to pay for a service or good?” If the answer is yes, then record the payable even if the invoice is received after the year-end. Was a service provided or have goods been received by year-end? If yes (and the amount has not already been paid), accrue a payable. In this chapter, we will cover the following things an accounts payable auditor need to consider:
So, let’s begin our journey of auditing accounts payable and expenses. Primary Accounts Payable and Expense AssertionsThe primary relevant accounts payable and expense assertions are:
Of these assertions, I believe completeness and cutoff (for payables) and occurrence (for expenses) are usually most important. When a company records its payables and expenses by period-end, it is asserting that they are complete and that they are accounted for in the right period. Additionally, the company is implying that amounts paid are legitimate. Accounts Payable and Expense WalkthroughsAs we perform walkthroughs of accounts payable and expenses, we are looking for understatements (though they can also be overstated as well). We are asking, “what can go wrong?” whether intentionally or by mistake. In performing accounts payable and expense walkthroughs, ask questions such as:
As we ask these questions, we inspect documents (e.g., payables ledger) and make observations (e.g., who signs checks or makes electronic payments?). So, we are inquiring, inspecting, and observing. If controls weaknesses exist, we create audit procedures to respond to them. For example, if--during the walkthrough--we see that one person prints and signs checks, records payments, and reconciles the bank statement, then we will perform fraud-related substantive procedures (more about this in a moment). Here's a short video about risk assessment for accounts payable auditors. Directional Risk for Accounts Payable and ExpensesThe directional risk for accounts payable and expenses is an understatement. So, perform procedures to ensure that invoices are properly included. For example, perform a search for unrecorded liabilities (see below). Primary Risks for Accounts Payable and ExpensesThe primary risks for accounts payable and expenses are:
Keep these in mind as you audit accounts payable. Common Payable and Expense Control DeficienciesIn smaller entities, it is common to have the following control deficiencies:
When segregation of duties is lacking, consider whether someone can use the expense cycle to steal funds. How? By making payments to fictitious vendors, for example. Or intentionally paying a vendor twice--and then stealing the second check. (See the section titled Auditing for Fraud below.) Risks of Material Misstatement for Payables and ExpensesIn smaller engagements, I usually assess control risk at high for each assertion. When I assess control risk at less than high, I have to test controls to support the lower risk assessment. Therefore, assessing risks at high is usually more efficient (than testing controls). When control risk is assessed at high, inherent risk becomes the driver of the risk of material misstatement (control risk X inherent risk = risk of material misstatement). The assertions that concern me the most are completeness, occurrence, and cutoff. So my RMM for these assertions is usually moderate to high. My response to higher risk assessments is to perform certain substantive procedures: namely, a search for unrecorded liabilities and detailed expense analyses. The particular expense accounts that I examine are often the result of my preliminary planning analytics. Search for Unrecorded LiabilitiesHow does one perform a search for unrecorded liabilities? Use these steps:
As the RMM for completeness increases, vouch payments at a lower dollar threshold. How should you perform a detailed analysis of expense accounts? First, compare your expenses to budget—if the entity has one—or to prior year balances. If you note any significant variances (that can’t be explained), then obtain a detail of those particular expense accounts and investigate the cause. Theft can occur in numerous ways—such as fictitious vendors or duplicate payments. If control weaknesses are present, consider performing fraud-related procedures. When fraud-related control weaknesses exist, assess the RMM for the occurrence assertion at high. Why? There is a risk that the expense (the occurrence) is fraudulent. So, how should you respond to such risks? Auditing for FraudAn example of a fraud-related test is one for duplicate payments. How?
In a duplicate payment fraud, the thief intentionally pays an invoice twice. He steals the second check and converts it to cash. This is just one example of expense fraud. There are dozens of such schemes. (See White Collar Crime is Knocking at Your Door: Are You Prepared?) Substantive Procedures for Accounts Payable and ExpensesMy customary audit tests are as follows:
If there are going concern issues, you may need to examine the aged payables listing. Why? Management can fraudulently shorten invoice due dates. Doing so makes the company appear more current. For example, suppose the business has three unpaid invoices totaling $1.3 million that were due over ninety days ago. The company changes the due dates in the accounts payable system, causing the invoices to appear as though they were due just thirty days ago. Now the aged payables listing looks better than it would have. Typical Payable and Expense Work PapersMy accounts payable and expense work papers usually include the following:
So, now you learned about auditing accounts payable. My next post addresses auditing payroll. In some entities such as governments, payroll makes up over 50% of total expenses. Consequently, knowing how to audit payroll expenses is of great importance. My next post is titled The Why and How of Auditing Payroll. So, stay tuned. See my prior posts in The Why and How of Auditing. Get Your Copy of the Why and How of AuditingClick the book cover below to go to Amazon. Get your copy of the Why and How of Auditing. Which of the following is the best audit procedure for the detection of unrecorded liabilities?Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities? Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end. How do you test an unrecorded liability audit?The auditor should verify the unrecorded liability by applying the given audit procedures:. The auditor shall verify purchase orders and all supporting documents with journal entries related to purchases and cash disbursals. ... . Analytical procedures are done in order to test the trend and look for unusual relations.. How do you find unrecorded liabilities?Search for unrecorded liabilities involves reviewing payment vouchers issued after year-end and unpaid supplier invoices as at the date of audit to check that all material liabilities relating to the financial year have been recorded as at year-end. Which of the following procedures would the auditor most likely perform in searching for unrecorded liabilities?Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? Vouch a sample cash disbursements recorded jsut after year end to receiving reports and vendor invoices. What is likely to be the most effective audit procedure to identify unrecorded accounts payable?d)examining selected cash disbursements in the period subsequent to the year-end is the best audit procedure for determining the existence of unrecorded liabilities. All liabilities must eventually be paid and will therefore be reflected in the accounts when paid if not when incurred. Which of the following audit procedures is best for identifying unrecorded liabilities?Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities? Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end. What are the audit procedures for accounts payable?There are four stages in a typical accounts payable auditing process: planning, fieldwork, audit reporting, and follow-up review. How do you audit unrecorded liabilities?The auditor should verify the unrecorded liability by applying the given audit procedures:. The auditor shall verify purchase orders and all supporting documents with journal entries related to purchases and cash disbursals. ... . Analytical procedures are done in order to test the trend and look for unusual relations.. What is likely to be the most effective audit procedure to identify unrecorded accounts payable?The most effective means of disclosing unrecorded accounts payable is to compare cash payments after year end to accounts payable trial balance. What is the purpose of the auditors review of cash payments subsequent to the balance sheet date?
Which of the following audit procedures would be best for identifying unrecorded liabilities?Correct answer is option c
Explanation: Auditor most likely vouch a sample of cash disbursements recorded just year-end to receiving reports and vendors invoices as it can provide the evidence for unrecorded liabilities if occurred.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?Choice “C” is correct. The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to the related receiving reports and vendor invoices; any payments made on transactions dated before year-end reflect a liability that should have been recorded.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables quizlet?Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
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