Another useful approach for auditing assertions is the inspection of documents. This is because internal documents contain much of a company's information, including its environment, assets and rights. Internal documents include meeting minutes, reports, manuals, certificates and deeds. For example, to verify the assertion of a right over an asset, an auditor can check the title, transfer deed, lease agreement or insurance contract. This helps determine whether the asset is in the company's name or is subject to the company’s right. Again, this offers a way to increase the reliability of the audit conducted on the business.
In this article, we will cover the audit procedures for Accounts Payable. In most circumstances, we commonly call Accounts Payable as Trade Payable. It is really important to perform proper audit procedures for Accounts payable as this is a critical portion of financial records and considered to be one of the high-risk items in the financial statements. In the accounts payable audit there is a high-risk of misstatement due to fraud or error, so strong accounts payable audit procedures are required to ensure the accuracy.
Objectives of Accounts Payable Audit
The main objectives of accounts payable audit are as follow:
- To ensure completeness of the accounts payable
- To ensure the existence of the accounts payable reported in the Balance Sheet
- To ensure that there is enforceable rights and obligations for the accounts payable
- To ensure the accuracy of accounts recorded in the Balance Sheet
- To ensure the valuation and allocation has been properly carried out for the recording of accounts payable
- Last but not least, the objective of auditing accounts payable is to ensure that there is proper presentation and disclosures in the financial statements.
Risks and Control Deficiencies in Relation to the Accounts Payable
In this section, we cover the risks for the accounts payable as well as the control deficiencies (sometimes called internal control deficiencies) that may happen for the accounting and management of accounts payable.
Below are the key risks associated with the accounts payable that we commonly encounter so far:
- An entity or management may intentionally account for or understate the accounts payable
- There is risk of duplicate payment to vendors as well as the payments were made to inappropriate suppliers or vendors.
- There is risk of late or missed payment to suppliers or vendors. This may result in penalty from vendors or further reassessment on tightening the credit terms in the future.
- Similarly, there is also possible risk on missing the accruals.
- There is a risk of possible fraud both internal (among internal staff) and external parties where collusion happen between staff and vendors.
In addition, there are also control deficiencies that auditor should assess and detect. The control deficiencies give rise to the possible fraud as well as other problems that result in the misstatement of accounts payable recorded and presented in the Balance Sheet. Below are the examples of control deficiencies that we commonly encounter during the course of the audit:
- There is no proper segregation of duties between the person to approve the purchases, record invoices into system as well as the person who make the payment. In addition, the person who perform the reconciliation on accounts payable is also not segregated.
- There is no properly review from other person before processing the payment.
- No properly reconciliation between accounts payable listing to General Ledger (GL) or to Trial Balance (TB).
- There might be only one person to process the electronic payment or transfer (TT). This raise doubt of internal control deficiencies.
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The above problems both on risk and control deficiencies are they key areas that shall need to take into account and perform the relevant audit procedures for the audit of the accounts payable.
In the later section of this article, we will cover the key assertions as well as the audit procedures for the audit of accounts payable.
Key Assertions of Accounts Payable Audit
As mentioned above, the audit on accounts payable is very important as it is the key and material items in the financial statements. In order to audit the accounts payable, it requires to use the combination of analytical procedures and tests of detail or substantive audit procedures for accounts payable. Typically, we perform the audit of accounts payable in conjunction with the audit of purchases. Thus, in this section, we will take some assertions that we usually test in combination with accounts payable. Below are the key audit assertions for accounts payable and we will group these assertions into 3 main types:
Financial Statements AssertionsAudit Objectives in Relation to the AssertionsAssertion about classes of transactionsOccurrence: This is to ensure that all purchase transactions are actually incurred and related to the entity.
Completeness: This is to ensure that the accounts payable balance reported on the balance sheet includes all payable transactions occurring during the period.
Accuracy: This is to ensure that all purchase transactions have been appropriately recorded at the correct amount.
Cut-Off: This is to ensure that all transactions have been recorded in the correct accounting period.
Classification: Auditors need to check if payable balances are properly classified in subclasses and debits and credits are accurately applied.Assertions about the account balance as at the year-endExistence: The existence assertion means that the accounts payable balance recognized in the financial statements actually exists at the reporting date.
Rights and Obligations: The rights and obligations assertion means that the company actually owes a liability for accounts payable at the reporting date.
Completeness: This is to ensure that the accounts payable reported on the Balance Sheet includes all accounts payable transactions occurring during the period.
Valuation and Allocation: The valuation assertion is ensuring the amount is correctly recorded. Assertions about presentation and disclosureThe combination of Occurrence, Rights and Obligations: For all these assertions, we want to ensure that the entity being audited has properly disclosed all events and transactions relating to the accounts payable and those have actually incurred and pertain to the entity.
Completeness: This is to ensure that the entity has included all required disclosures.
Classification and Understandability: This is to ensure that all accounts payable are properly presented and all required disclosures have been clearly expressed.
Accuracy and Valuation: This is to ensure that all financial and other information have been disclosed fairly at the appropriate amounts.Key Audit Procedures for Accounts Payable Audit
In order to easily understand about each types of audit procedure, we will group all those audit procedures into 9 categories as below:
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Please note that in one audit procedure is able to ensure one or more audit assertions. Thus, you might see the same audit procedure for each group of assertions in this section.
Completeness
Under this section, the auditor perform the audit procedures to ensure and confirm accuracy and valuation which is part of the presentation and disclosure assertion of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.
What are the most important assertions in auditing accounts receivable and why?
The primary relevant accounts receivable and revenue assertions are: Existence and occurrence. Completeness. Accuracy.
Why is it important to audit accounts payable?
An accounts payable audit is a normal part of financial due diligence in any company, and using the most effective auditing methods ensures that ledger transactions match general ledger entries and payable records to eliminate risk of fraud and reveal any errors.
What are the focus of audit in purchase and accounts payable?
It examines how AP transactions are being recorded and if it represents an accurate view of your business operations. In many audits, the main focus is your accounts payable department. That's because it's quite easy to increase a company's net income by not recording end-of-term payables.
What are the main audit assertions?
There are numerous audit assertion categories that auditors use to support and verify the information found in a company's financial statements..
Existence. ... .
Occurrence. ... .
Accuracy. ... .
Completeness. ... .
Valuation. ... .
Rights and obligations. ... .
Classification. ... .
Cut-off..
