Auditing Principles - CH 14 - AP & Other Liabilites

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Auditing Principles - CH 14 - AP & Other Liabilites
2014-11-16 15:05:30
Auditing Principles 14 AP Other Liabilites

Auditing Principles - CH 14 - AP & Other Liabilites
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  1. Sources of AP
    • Short term obligation 
    • -buying merchandise on credit
    • -receipt of services such as advertising, repairs

    Invoices/statements from suppliers 

    Interest bearing obligations are NOT included in AP (included as bonds, notes)
  2. Sources of Accrued Liabilites
    • sometimes called accrued expenses
    • -salaries, interest, rent

    accumulate over time and mgmt must make estimate
  3. Primary Concern
    • Possibility of understatement or omission of liabilities
    • -Exaggerates the financial strength of company
    • -Conceals fraud as effectively as overstatement of assets
    • -Accompanied by understatement of expenses and overstatement of net income
  4. Controls Over the Acquisition Cycle
    • ØSegregation of duties--purchases and
    • disbursements
    • ØApproval of purchase orders
    • ØNumerical control of purchase orders and
    • receiving reports
    • ØMatching of details of vendors’ invoices
    • to purchase orders and receiving documents
    • ØApproval of vendors’ invoices
    • ØPre-numbered checks
    • ØReconciliation of details of individual
    • disbursements to controlling accounts
    • ØReconciliation of vendors’ statements to
    • accounts
    • ØReconciliation of bank accounts
    • ØUse of budgets and analysis of variances
    • ØUse of chart of accounts and review of
    • account coding
  5. Acquisition Cycle--Documents
    ØPurchase order

    ØReceiving report

    ØVendor’s invoice

    ØVendor’s statement
  6. Audit Documentation
    ØWorking papers

    • -Lead schedule for accounts payable
    • -Trial balances of various types of accounts payable
    • -Confirmation requests for accounts payable
    • -Listing of unrecorded accounts payable
  7. Risks of Material Misstatement
    Controls against misstatements
    -Auditors found serially numbered receiving reports are prepared

    -Serially numbered vouchers are prepared

    -Payments made promptly on due dates

    -immediately recorded in accounting records

    • -Independent employee reconciles subledger to
    • general ledger
  8. Risks of Material Misstatement
    Risks of misstatements
    -Subsidiary records not in agreement with general ledger

    -Receiving reports and vouchers used haphazardly

    -Purchase transactions often not recorded until payment is made

    -Many accounts payable long past due

    • ØRisks such as these indicate the need for
    • extensive substantive procedures
  9. Accounts Payable Audit Steps 
    Step A-C
    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
  10. Accounts Payable Audit Steps
    Step D
    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.
  11. Accounts Payable Audit Steps 
    Step E
    • 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.

    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.
  12. Contrasting Confirmation of Accounts Payable and Accounts Receivable
    • AP
    • Primary Objective: Completeness
    • Other Evidence Available: external
    • Confirmation Required: No

    • AR
    • Primary Objective: Existence
    • Other Evidence Available: Internal Confirmation Required: Yes
  13. Search for Unrecorded A/P
    ØBe alert during reconciliations, confirmations and analytical procedures for unrecorded liabilities

    • ØExamine transactions recorded following
    • year-end
    • lCompare cash payments after year-end to a/p trial balance
    • lExamine cash disbursements over specific dollar amounts during subsequent period
  14. Potential Sources of Unrecorded A/P
    • ØUnmatched invoices and unbilled receiving
    • reports

    • ØVouchers payable entered in the voucher
    • register subsequent to balance sheet date

    • ØInvoices received after balance sheet
    • date

    • ØConsignments in which client acts as a
    • consignee
  15. Adjusting entry needed?
    • ØMisstatements and omissions are judged
    • based on impact on the financial statements

    • lMateriality
    • •Effect on net income
    • •Need to consider cumulative effect on the
    • financial statements
  16. Amounts withheld from employees’ pay
    • ØIncome taxes withheld from employees’ pay
    • but not remitted as of balance sheet date

    • ØTrace amounts withheld to payroll summary
    • sheets

    • ØTest computations of taxes withheld and
    • accrued

    • ØDetermine that taxes have been deposited
    • in accordance with law
  17. Sales Tax Payable
    • ØRequired to collect sales tax imposed by
    • state and local governments

    ØNot an expense, just collecting agent

    ØLiabilities until remitted

    ØVerify liability by reviewing tax return

    ØTest reasonableness of amount

    ØTest invoices for correct tax charge
  18. Unclaimed wages
    ØSubject to misappropriation

    • ØConcerned with adequacy of internal
    • control

    lShould not be left for more than a few day

    lPrompt deposit in special bank account

    ØAnalyze unclaimed wages to determine

    lCredit represents all unclaimed wages after each payroll distribution

    lDebits represent authorized payments
  19. Customers’ Deposits
    • ØDeposits on returnable containers or to
    • guarantee payment of bills

    • ØReview procedures followed in accepting
    • and returning deposits

    • ØVerify list of individual deposits and
    • compare to general ledger account

    ØGenerally do not confirm
  20. Accrued Liabilities
    • ØObligations payable sometime during the
    • succeeding period for services or privileges received before balance sheet date

    • ØExamples: Interest payable, accrued
    • property taxes

    • ØAccounting estimates
    • -Review and test management’s process of developing the estimate
    • -Review subsequent events
    • -Independently develop estimate to compare
  21. Accrued Liabilities 
    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.
  22. Accrued Liabilities 
    ØAccrued Property Taxes

    ØAccrued Payrolls

    ØPension Plan Accruals

    • ØPostemployment Benefits other than
    • Pensions

    ØAccrued Vacation Pay

    ØProduct Warranty Liabilities

    ØAccrued Commission and Bonuses

    ØIncome Tax Payable

    ØAccrued Professional Fees
  23. Presentation
    • ØCurrent liability
    • -Accrued expenses
    • -Deferred income tax for next year
    • -Deferred credits for rent
    • -Deposits on contracts

    • ØLong-term liability
    • -Deferred income tax - noncurrent
  24. Time of Examination
    • ØMost effective when performed immediately
    • after the balance sheet date

    ØLittle value if done before because concern with understatements

    • ØSome can be done at interim:
    • -Accrued property taxes
    • -Amounts withheld from employees’ pay