AUDIT ON ACCOUNT PAYABLE

I.AUDIT PROCEDURE FOR ACCOUNT PAYABLE ASSERTIONS

When testing accounts payable, assertions about purchases and cost of goods sold are also involved.

Completeness

Do the balances contain all transactions for the period?

• Reconcile accounts payable ledger with control account.
• Purchases cutoff test tests to determine if goods for which title has passed or not passed are appropriately accounted for.  FOB shipping point and FOB destination are critical to this test.
• Analytical procedures.  Accounts payable turnover (day) is very important.Unusual relations should be investigated.
• Cash disbursements cutoff test.  Test if cash disbursement and accounts payable reduction are reconcilable.    Inspect the last check written and trace it to the accounts payable subsidiary ledger.
• Trace subsequent payments to recorded payables.  Match checks issued subsequent to year end with the related payable.  Checks should be issued only for payables that existed on the balance sheet at year end.  Any check that cannot be matched may represent an unrecorded liability at year end.  Companies may delay recording a liability to improve their current ratio.  Most important test for completeness of accounts payable.
• Search for unvouchered payables.  In a voucher system, a voucher is not prepared until the requisition, receiving report, and sellers invoice are reconciled with the purchase order.  Auditors search open files for unmatched documents.

Existence/Occurrence

Do the recorded accounts payable represent valid liabilities at the balance sheet date?

• If confirmations are used, small and zero balances should be sampled as well as large balances.  For example, if orders are placed with a vendor on a consistent basis, a confirmation should be sent to the vendor regardless of the balance due at year end.
• Vouch recorded payables to documentation.

Rights and Obligations

Does the balance of accounts payable reflect the liability of this entity? Not tested very much.

• Inquire of management about the types of payables.

Valuation/Allocation

Are accounts payable valued in accord with International Financial Reporting Standards (IFRS)?

Presentation/Disclosure

Is the accounts payable balance properly presented and disclosed?

• Inspect the financial statements.  Accounts payable should be listed as a current liability.  Purchases should be listed in the calculation of cost of goods sold.
• Read the footnotes.  Unusual transactions involving accounts payable should be disclosed, such as related party transactions involving accounts payable.
• Obtain a management representation letter with assertions relating to accounts payable and purchases.

 

II.PRACTICAL DOCUMENTS FOR TRADE PAYABLE AUDIT

• Purchase request
• Purchase orders
• Quotations from suppliers
• Contracts with suppliers
• Delivery note from supplier
• Goods received note
• Invoice from supplier
• Official receipt from supplier
• Payment voucher
• Daily cash report ( most important)
• Cash book, Bank statement and bank reconciliation etc.

Practical Question

AZC Import and Export Company is medium company that has significant trade payables.

The following trade payables as of 31 December 2017 are as follows:

QTG	908,000
Great One Co	7,000
Import and Export  Co	9,000
TBK Shop	15,000
QAX	5,000
Top One	32,000
World Diamond Group	10,000
Trading Co	5,000
AEL Group	13,000
	1,004,000

 

Required:

You are required to make audit procedure to audit account payable above based on your professional judgment.

Answer 

• sample size ( risk assessment ) : 5 suppliers/5 AP
• How to select sample
• Request record/soft of data
• Request hard accounting documents
• Bank statement
• Audit procedures:

+invoice/receipt from supplier compare with record : inspection

+ confirm balance with supplier

+ sum each of AP with total AP ( recalculation)

 

Summary of Account Payable Audit

1. List of Individual AR & Control Account of AP: AP, Mr.1 + AP, Mr.2 + AP, Mr.3+…….+AP, Mr.100 = Total AP ( Balance sheet)
2. Audit scope
3. Determine Sample Size / Population
4. How to select sample  : random  , judgment
5. Request Soft Journal/transaction Record/General Ledger
6. Hard Accounting Documents
7. Bank Statement
8. Audit procedures (7 points): inspection, recalculation, confirmation  etc.