To ensure completeness of reported liabilities at year end, a useful test is a subsequent search for unrecorded liabilities. Within Audit Accelerator, you can complete the search for recorded liabilities using the drill-down function within Bank Accounts to see payment activity subsequent to year end. Show
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To access unrecorded liabilities, do the following:
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 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. How do you test for 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. What is the best audit procedure for determining the existence of unrecorded liabilities?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. How do auditors verify liabilities?Verification and Valuation of Liabilities. Auditor should collect schedule of creditors and that should tally with ledger balances.. Purchase ledger should be checked and verified with purchase register, purchase invoices and debit notes etc.. Auditor should verify the discount received or receivable from creditors.. How do you perform an audit test?There are five main methods to walk through and test each control in place at the service organization. These methods include (listed in order of complexity from lowest to highest): inquiry, observation, examination or inspection of evidence, re-performance, and computer assisted audit technique (CAAT) Which of the following audit procedures is best for identifying unrecorded accounts payable?Which of the following audit procedures is best for identifying unrecorded trade accounts payable? Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period.
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.
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.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?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.
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