Question

1.   If the auditor suspects that payables are not being processed correctly yet credit memoranda are being issued to vendors for goods returns, what test of control procedures might the auditor perform to investigate this problem?

2.  If the auditor suspects that a client is not recording all payables, what test of control procedure might the auditor perform to obtain the evidence?

3. Identify and discuss two test of controls the auditor might test in Accounts Payable

4,  If the auditor suspects that Accounts Payable might be understated, what test of control procedures might the auditor perform to determine whether invalid payables are being recorded?

Answer 1

Test of controls is an audit procedure incorporated by the auditor in the audit process to test the effectiveness of a control used by the organization to prevent or detect the material mis statements. The performance of these tests and the relative results help the auditor in deciding whether to rely on the controls incorporated by the client organization.

Accounts payable is considered one of the high risk area in the auidt of accounts payable and purchases. unrecorded liabilities , fraud or duplication of payments might happen if the control procedure incorporated is not strong or properly in place. In organizations where high risk of fraud is identified by the auditors, quenstionnaires are sent out to to the vendors asking them to fill out the required information such as outstanding innvoices, payment terms, transaction history etc.

Now lets dig into the cases given above;

1) In cases where the auditor suspects that the payables are not being processed correctly and yet credit memorandums are being issued to vendors for goods return, the auditor shall look into correctness and valuation aspects.

The auditor shall perform test of controls on following assertions:

a) Existence - confirming that the account payable balances reported in the financial statememts actually exist at the same balance at the reporting date.

b) Valuation - for confirming that the accounts payable have been recorded in the correct amount and their balances reflect their actuall economic value.

The primary test of controls to be performed in this case are Inquiry and confirmation by reconciliation of balances of  accounts payable with vendor statements to ensure existense and correct valuation of payables.

2) Incases where the auditor suspects that the client is not recording all payables, the test of control on the assertion of Completeness - to confirm that the account payable balances reported on the balance sheet include all transactions that have occurred during the period, shal be put in place.

The test of controls required here is Inspection by examination of supporting documents and examination of history of transactions from suppliers to ensure completeness of records.

3)Two test of controls the auditor might test in accounts payable are:

a) Reperformance - Auditors may initiate a new transaction to analyze which controls have been put in place by the organization and the effectivess of such controls.

b) Inspection - Auditors may perform examination of  business documents for appropriate authorization from authorized signatories, stamps, reviews which indicate that controls have been performed.

4) If the audiotr suspects that accounts payable might be understated, then the auditor must perform test of control procedure is that ensures completeness of accounts payable. The main control for accounts payable is the Reperformance by reconciliation of balances with suppliers statements. This type of control may help ensure completeness of accounts payable.

If the client performs this control either monthly or yearly, the auditor can perform the test of control by examining and evaluating the clients procedure of performing these reconciliation and re perform the monthly reconciliation of supplier statements to relevant payables in the accounting period.