Question

b. The seven balance-related audit objectives related to accounts payables include:

1. Accounts payable in the accounts payable list agree with related master file, and the total added is correct and agrees with the general ledger (detail tie-in).

2. Accounts payable in the ac-counts payable list exist (existence).

3. Existing accounts payable are included in the accounts payable list (completeness).

4. Accounts payable in the ac-counts payable list are accurate (accuracy).

5. Accounts payable in the ac-counts payable list are correctly classified (classification).

6. Transactions in the acquisition and payment cycle are recorded in the proper period (cutoff).

7. The company has an obligation to pay the liabilities included in accounts payable (obligations).

Required

Select any Five (5) out of the above seven (7) balance-related audit objectives, suggest a substantive test of details of balances procedures used. 10 marks

Total 25 marks

Answer 1

2. Accounts payable in the ac-counts payable list exist (existence)

When accounts payables are audited, the existence assertion should be tested to ensure that the accounts payable balance shown on the balance sheet really exists at the reporting date.

Example: tests of existence in accounts payable audit include:

· Select a sample of payable accounts and vouch them to the supporting documents, such as purchase orders and suppliers’ invoices.

· Select a sample of payable accounts and reconcile them to the suppliers’ statements

· Perform accounts payable confirmation on a sample of suppliers

3. Existing accounts payable are included in the accounts payable list (completeness).

For the audit of accounts payable, the completeness assertion should be tested to ensure that all accounts payable and their transactions occurred during the year have been recorded. Lack of completeness would result in the understatement of accounts payable.

Example: tests of completeness in accounts payable audit include:

· Obtain accounts payable listing the client and perform casting and cross-casting to the general ledger to ensure their balances are matched.

· Select a sample of suppliers’ statements and reconcile them to the accounting records.

· Test for unrecorded liabilities by examining the transactions after year-end and those of unrecorded invoices.

Usually, by performing the reconciliation of suppliers’ statements, the assertions of completeness can be ensured.

5. Accounts payable in the ac-counts payable list are correctly classified (classification)

When accounts payables are audited, the classification assertion should be tested to ensure that the accounts payable balance shown on the balance sheet is correctly classified at the reporting date.

Example: tests of classification in accounts payable audit include:

· Review trade accounts payables for any debit balances and enquire with management if these should be reclassified within payables

· Review the period for which the accounts payables have been outstanding to see if they are indicating a challenge to the going concern assumption of the company

6. Transactions in the acquisition and payment cycle are recorded in the proper period (cutoff).

For the audit of accounts payable, the cutoffa ssertion should be tested to ensure that acquisition and payment cycle are recorded in the proper period. Lack of such proper reporting would result in misreporting of of accounts payable.

Example: tests of cutoff in accounts payable audit include:

· For a sample of invoices received after year end ensure that these are included with end of year accruals

· Perform calculation of purchase returns as a % of sales or cost of sales and compare to prior year results

7. The company has an obligation to pay the liabilities included in accounts payable (obligations).

The right and obligation assertion should be tested to see whether the company actually has liability for accounts payable reported. Likewise, this assertion can be tested by vouching a sample of payable accounts to supporting documents.

In this area, the long-term contracts that the client has with its suppliers should also be examined. The client may have an agreement to purchase the goods from suppliers at a specific price.

There may be a circumstance where the client no longer receives benefit from the contract and want to terminate them. In this case, what has to be seen is if there are any penalties involved.