Question

Jessie and Jones, partners in Jessie and Jones, CPAs, are planning their audit program for the audit of accounts payable on the Smother Corporation’s annual audit. Saturday afternoon, they reviewed the thick file of last year’s working papers, and both of them remembered all too well the six days they spent last year on accounts payable.

Last year, Jessie had suggested that they mail confirmations to 100 of Smother’s suppliers. The company regularly purchases from about 1,000 suppliers, and these account payable balances fluctuate widely, depending on the volume of purchases and the terms Smother’s purchasing agent is able to negotiate. Jessie’s sample of 100 was designed to include accounts with large balances. In fact, the 100 accounts confirmed last year covered 80% of the total accounts payable.

Both Jessie and Jones spent many hours tracking down minor differences reported in confirmation responses. Non-responding accounts were investigated by comparing Smother’s balance with monthly statements received from suppliers. Ultimately, they determined that the accounts payable balance was not materially misstated.

Required:

Identify the accounts payable audit objectives that the auditors must consider in determining the audit procedures to be performed.

Identify situations when the auditors should use accounts payable confirmations and discuss whether they are required to use them.

Answer 1

Identify the accounts payable audit objectives that the auditors must consider in determining the audit procedures to be performed.

Ans: An accounts payable audit can be the sole focus or a portion of a full internal audit. General audit strategies are the same, however, regardless of the reason or reasons for which it's taking place. AP auditing strategies are based on fraud risk assessment standards compiled by the Auditing Standards Board of the American Institute of Certified Public Accountants.  

The primary focus is on ensuring accounts payable is neither under - nor overstated. The process works to ensure invoices and statements as well as any other liabilities and accrued expenses have been properly calculated and recorded, whether manually or in a computer accounting program.

Objectives of accounts payable audit:

The main and the foremost objectives of accounts payable audit that the auditors must consider in determining the audit procedures to be performed are given below;

Audit Objective

Areas of Risk

Vendor invoicing and University review and approval processes. University payment processes. Management review of unreconciled items, unusual transactions, and backlogs. Management review of edits and checks to enable identification of unusual or unexpected transactions. Data recording and reporting Other processes, as needed.

Inadequate attention to cut off may result in significant overstatement or understatement of liability. Reliability of data may be reduced if all liabilities are not captured as of the cutoff or if data is not captured accurately. Reliability of data may suffer if system edits are not designed or functioning to alert management of unusual data, such as duplicate invoicing or false billing. Lack of timely review of reports by management may result in degraded quality of liability data.

Identification of Situations when the auditor should use accounts payable confirmations and whether they are required to use them.

Definition of Confirmation process

Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information.

The standards of Field Work

• Selecting items for which confirmations are to be requested.
• Designing the confirmation request.
• Communicating the confirmation request to the appropriate third party.
• Obtaining the response from the third party.
• Evaluating the information, or lack thereof, provided by the third party about the audit objectives, including the reliability of that information.

Confirmation of Accounts Receivable

Confirmation of accounts receivable is a generally accepted auditing procedure. It is generally presumed that evidence obtained from third parties will provide the auditor with higher - quality audit evidence than is typically available from within the entity. Thus there is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless one of the following ts true:

• Accounts receivable are immaterial to the financial statements.
• The use of confirmations would be ineffective.
• The auditor's combined assessed level of inherent and control risk is low, and the assessed level, in conjunction with the evidence expected to be provided by analytical procedures or other substantive tests of details, is sufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions. In many situations, both confirmation of accounts receivable and other substantive tests of details are necessary to reduce audit risk to an acceptably low level for the applicable financial statement assertions.

An auditor who has not requested confirmations in the examinations of accounts receivable should document how he or she overcame this presumption.

Conclusion

From the above question given jessie and jones, are partnership firms, CPA's are advised for confirmation process to audit accounts payable based on the presumption that evidence obtained from third parties (like as above problem is 100 smoother's supplier) will provide the auditor with higher - quality audit evidence than is typically available from within the entity.