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1、Chapter3 Auditing Accounts Payable and Related Purchasing Cycle AccountsBrowse Location: United StatesPwC MaterialMontgomerys Auditing, Twelfth EditionPart 3: Auditing Specific Accounts 23 Auditing Accounts Payable and Related Purchasing Cycle Accounts 23.1 Audit Objectives 23.2 Identifying Inherent
2、 Risks 23.3 Analytical Procedures 23.4 Substantive Tests of Details (a) Control Risk Assessment and the Nature, Timing, and Extent of Substantive Tests, (i) Early Substantive Testing, (b) Cutoff Tests of Purchases, (c) Accounts Payable, (d) Salaries, Wages, and Payroll Taxes, (e) Costs and Expenses,
3、 (f) Searching for Unrecorded Liabilities, This chapter discusses substantive tests that the auditor may use to achieve the audit objectives related to purchasing cycle accounts, principally accounts payable and related costs and expenses. The audit strategy that determines the nature, timing, and e
4、xtent of substantive tests for each account balance and class of transactions in the purchasing cycle is based primarily on the auditors identification of inherent risks and assessment of materiality and control risk relating to specific audit objectives, and on efficiency considerations. 23.1 AUDIT
5、 OBJECTIVESSpecific audit objectives applicable to accounts in the purchasing cycle are described in Figure 23.1. 23.2 IDENTIFYING INHERENT RISKSAs discussed in Chapter 8, the auditor obtains or updates information about various aspects of the entity and its business in order to identify inherent ri
6、sks. Liabilities and related expenses are more likely to be understated or omitted from the accounts than overstated, because the account balances usually consist of items that have been scrutinized and acknowledged before being recorded and because attempts to improve financial statement presentati
7、on may involve a failure to recognize valid liabilities and expenses. Therefore, substantive tests in the purchasing cycle concentrate heavily on seeking evidence of omitted or understated liabilities, although the possibility of overstatement is not ignored. 23.3 ANALYTICAL PROCEDURESAnalytical pro
8、cedures frequently highlight relationships between accounts and risks not otherwise apparent during the risk assessment phase of the audit. As discussed in Chapter 8, analytical procedures are a required part of planning; their use at an early stage in the audit often results in more informed strate
9、gy decisions. The procedures discussed in this section, however, also can be applied in the substantive testing and final review stages of an audit. Scanning the detailed list of accounts payable and investigating significant unusual items, such as debit balances and old unpaid invoices, are analyti
10、cal procedures that are particularly relevant to auditing payables and purchases. Scanning the accounts payable listing can be an effective means of identifying unusual audit risks associated with payables and purchases. For example, the existence of old unpaid invoices or uncleared debit advices ma
11、y indicate disputes with suppliers or the inclusion of invalid invoices. When deciding whether to scan the detailed listing of accounts payable, the auditor considers whether debit balances could be significant and the entitys internal controls, particularly monitoring controls. For example, if mana
12、gement reviews the accounts payable listing for purposes of managing cash flow or reviewing budgets, the likelihood of unusual balances may be decreased. Figure 23.1 Audit Objectives for Purchasing Cycle Accounts Accounts payable represent all amounts owed Completeness by the entity at the balance s
13、heet date arising from the purchase of goods and services. All goods and services received, less goods returned, during the period covered by the financial statements are reflected in the financial statements. All employee wages for services performed during the period covered by the financial state
14、ments are reflected in the financial statements; accrued payroll represents all amounts owed to employees at the balance sheet date. Purchase transactions are based on correct prices and quantities and are accurately Accuracy computed and classified in the appropriate general ledger and accounts pay
15、able subsidiary ledger accounts. The accounts payable subsidiary ledger is mathematically correct and agrees with the general ledger. All payroll amounts are based on correct wage rates and hours, and are accurately computed, summarized, and classified in the appropriate general ledger accounts. Exi
16、stence/Occurrence Recorded accounts payable represent amounts owed by the entity at the balance sheet date. Recorded purchase transactions represent goods and services actually received during the period covered by the financial statements. Recorded payroll transactions represent wages for services
17、actually performed during the period covered by the financial statements. Purchase transactions, accounts payable, Cutoff returns, and payroll transactions are recorded in the proper period. Valuation/Allocation Accounts payable and accrued payroll are stated at the correct amounts the entity owes.
18、All expenses and losses applicable to the period have been recognized, including unrealized losses on unfavorable purchase commitments. Accounts payable and accrued payroll are legal Rights and Obligations obligations of the entity at the balance sheet date. Presentation and Disclosure Accounts paya
19、ble, accrued payroll, and expenses are properly described and classified in the financial statements. Loss contingencies related to purchase commitments are properly disclosed. Analytical procedures can indicate trends in expenses that may assist the auditor in assessing risk. Relationships among ex
20、pense accounts and between expense and other accounts should be reviewed and compared with those of prior periods and those anticipated in budgets or forecasts. The account balances themselves often are compared from month to month and with the corresponding period of the prior year. Trends and fluc
21、tuations (seasonal and other) should be noted and explanations sought for unusual patterns. The auditor should consider managements performance of analytical procedures as part of its monitoring controls. The auditor may obtain an understanding of the procedures performed by management and consider
22、using their results to supplement his or her own analytical procedures. Management typically reviews various internal expense and budgetary reports and data, such as the following: Actual gross profit compared with historical trends and budgets or forecasts Actual expenses, including payroll, compar
23、ed with historical trends and budgets Trends of returns and debit memos Accounts payable aging Open purchase commitments Managements review of reports such as these may help identify material misstatements in the processing of purchase transactions. For example, investigation of significant differen
24、ces between reported expenses and budgeted and historical expenses could identify incomplete updating of invoices to the general ledger. The way management responds to the auditors inquiries resulting from analytical procedures may give some indication of the quality of the entitys control environme
25、nt. For example, prompt, logical, and meaningful answers to questions about differences between current-year expenses and budgeted amounts as of an interim date or corresponding prior-year amounts would provide some indication, in the absence of evidence to the contrary, that the entitys management
26、is in control and that the accounting system and control activities appear to be functioning as intended. Analytical procedures, however, also may indicate trends, even in well- controlled entities, that may lead the auditor to extend substantive tests. 23.4 SUBSTANTIVE TESTS OF DETAILSSubstantive t
27、ests of details applied to purchasing cycle accounts are directed principally to accounts payable. The assurance needed for income statement accounts usually is obtained from a combination of tests of controls, analytical procedures, and substantive tests of details applied to balance sheet accounts
28、. The remainder of this section describes substantive tests of details that could be performed with respect to accounts payable. The tests that actually are selected, as well as their timing and extent, will depend on the auditors assessment of control risk, as well as his or her identification of i
29、nherent risks and assessment of materiality. It would be highly unusual for all of the procedures described in the remainder of this section to be applied in a particular audit. (a) Control Risk Assessment and the Nature, Timing, and Extent of Substantive TestsThe auditor is required to obtain an un
30、derstanding of the entitys internal control sufficient to plan the audit; the auditor also should assess control risk for the assertions embodied in the financial statements-in this case, the assertions related to payables and related expenses. The understanding and the assessment are used to identi
31、fy the types of misstatements that might occur and the controls that may reduce the likelihood of their occurrence. Based on that information, the auditor determines the nature, timing, and extent of substantive tests. Obtaining the understanding and assessing control risk for accounts in the purcha
32、sing cycle are discussed in Chapter 14. The auditor achieves the audit objectives related to purchasing cycle accounts by performing substantive tests or a combination of substantive tests and tests of controls. The auditor frequently tests controls to obtain evidence of their effective operation as
33、 a basis for reducing the assurance needed from substantive tests directed at the completeness, accuracy, and existence/occurrence audit objectives. Chapter 14 presents an illustration of the strategy decisions an auditor might make in auditing the purchasing cycle. Before performing substantive tes
34、ts on accounts payable, the auditor needs assurance that the detailed list of accounts payable in the subsidiary ledger (usually referred to as the accounts payable trial balance) contains all purchase transactions that remain unpaid at year-end and reconciles to the related control account in the g
35、eneral ledger. If the results of tests of controls provide sufficient evidence about the completeness of the trial balance, substantive tests of the completeness of accounts payable generally will be limited to analytical procedures. Also, when control risk has been assessed at low, or when the acco
36、unting system is reliable because secure packaged software is used, it should not be necessary to test the mathematical accuracy of the detailed list. The auditor should consider the possibility, however, that information from the detailed list could be suppressed, either during the report writing p
37、rocess or subsequent to its printing. Normally, entity personnel routinely compare the general ledger control account balance with the total of individual accounts payable, investigate discrepancies between the two, and make appropriate adjustments. The auditor should trace the trial balance total t
38、o the general ledger and determine that all reconciling items are appropriate. Reconciling items may indicate potential material misstatements resulting from, among other things, cutoff problems, unusual transactions, or internal control breakdowns. The auditor also may examine support for adjustmen
39、ts made throughout the year in reconciling detailed accounts payable to the control account to obtain assurance that those adjustments were properly authorized and posted to the control account. In deciding whether to perform this test, the auditor should consider whether there is appropriate divisi
40、on of duties and whether differences disclosed by the reconciliation of the subsidiary ledger to the control account are appropriately investigated and corrected on a timely basis. If these procedures are not in effect, or if there is a lack of division of duties between individuals responsible for
41、initiating and recording purchases and related transactions, recording cash disbursements, maintaining the accounting records, and reconciling the detailed records to the control account, the risk of misstatement is increased and the auditor should perform this test. In some entities, however, entri
42、es to the control account may be numerous, and it may not be necessary to evaluate all of them. The auditor should focus attention on those entries arising from the reconciliation process by reviewing the reconciliations, identifying unusual adjustments, reviewing authorizations (when appropriate),
43、and tracing the adjustments to supporting documentation and the general ledger. If the auditor has assessed control risk for purchases and accounts payable at low for the audit objectives of completeness, accuracy, and existence/occurrence, substantive tests addressing those objectives may be limite
44、d to analytical procedures. No detailed tests of transactions supporting the completeness and accuracy of purchases of goods and services need be performed. If the auditor has assessed control risk for purchases and accounts payable below the maximum for the audit objectives of completeness, accurac
45、y, and existence/ occurrence, it will be necessary to obtain evidence that the entity has implemented procedures to ensure that all purchases are recorded (completeness) and that those procedures have operated as prescribed. The auditor also should examine disbursements records for a period after th
46、e balance sheet date, choosing items on the basis of high-dollar coverage. The auditor also will need assurance from substantive tests about the accuracy and existence of accounts payable on the detailed listing. When control risk has been assessed below the maximum, the auditor should establish the
47、 extent of testing so as to obtain a moderate to low level of assurance that the audit objectives of completeness, accuracy, and existence/occurrence are achieved. The auditor also should consider whether evidence obtained from tests directed at one audit objective is relevant to other audit objecti
48、ves as well. In the unlikely event that the auditor has assessed control risk for purchases and accounts payable at maximum for the audit objectives of completeness, accuracy, and existence/occurrence, it will again be necessary to obtain evidence that all purchases are recorded (completeness). To e
49、stablish completeness of accounts payable, the auditor should examine disbursements records for the period after the balance sheet date and files of unmatched receiving reports, purchase orders, and vendor invoices and files of pending claims and credits for returned goods, as described below. The auditor also should trace selected liabilities on the accounts payable
