Audit Procedures for Accounts Payable

Introduction

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 Assertions
Assertion 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 completeness of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

  • Auditor should check the current year opening balance by comparing the balance with last year’s closing balance.
  • The total balance for vendors can be obtained from the general ledger and can be compared the total balances from the listing to check actual balance has been recorded in the ledger.
  • The auditor should check the client’s payables posting process. For a sample of vendors they should inspect documentation to ensure correct figures are posted in the system.
  • The auditor should send balance confirmation to the company’s vendor asking them to confirm the balance owed. If there is a mismatch between the balance confirmed by the vendor and the balance recorded in the accounts payable ledger, the audit team will need to inquire about the reason.  
  • They will perform tests for unrecorded liabilities by examining year-end transactions and unrecorded invoices.
  • Perform the analytical procedures to compare the balance of accounts payable of current year to previously. In addition, auditor also may compare the balance owned to each selected individual suppliers of current year to prior years as well.
  • Perform the analytical procedures to compare the accounts payable turnover as well as accounts payable days (sometimes called average accounts payable payment period) to previous years or to any industry data.

Existence

Under this section, the auditor perform the audit procedures to ensure and confirm Existence of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

  • For the selected accounts payable, perform the vouching from the listing to the supporting documents such as suppliers’ invoice, purchase orders/contracts and other relevant documents.
  • For the selected supplier’s invoices, perform the reconciliation to the suppliers’ statements.
  • Confirm the reasonableness of accounts payable by performing the analytical procedures to compare the current year balances of accounts payable to previous year balances. Similarly, auditor shall calculate the accounts payable turnover of current year to previous years to confirm the reasonableness of such ratio.
  • Obtain the confirmation of accounts payable to confirm the existing of accounts payable.
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Rights and Obligations

Under this section, the auditor perform the audit procedures to ensure and confirm rights and obligations of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

They should vouch a transaction from inception to completion by reviewing original source documents like purchase orders, vendor invoices, journal entries and bank records.

Valuation and Allocation

Under this section, the auditor perform the audit procedures to ensure and confirm Valuation of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

The auditor should ensure that accounts payable transactions are recorded in compliance with Generally Accepted Accounting Principle (GAAP).

From the selected invoices from the accounts payable listing, trace the amount recorded to the supporting documents such as suppliers’ invoices, purchase orders/contracts and other relevant supporting documents.

Reconcile the suppliers’ invoices to the suppliers’ statement to ensure the amount is correct.

The auditor should compare the accounts payable balance of current year to previous years. In addition, they should also compare the selected individual amount owed in the accounts payable listing for current year to previous years as well.

 Perform the analytical procedures to compare the accounts payable turnover as well as accounts payable days (sometimes called average accounts payable payment period) to previous years or to any industry data. This is the same audit procedure to ensure the completeness assertion as described in the above.

Cut-Off

Under this section, the auditor perform the audit procedures to ensure and confirm cut-off of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

The auditor should select sample of vouchers and verify the date on the vouchers to ensure that the transactions have recorded in the correct period.

Particularly, the selection of transactions around the year-end and at the beginning of the following year. Then determine to ensure that those transactions were recorded in the correct period.

Accuracy

Under this section, the auditor perform the audit procedures to ensure and confirm accuracy of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

  • The auditor should recalculate the individual vendor’s breakup balances to verify the total figures are correctly calculated.
  • For the selected suppliers’ invoices, perform the recalculation to ensure the mathematically accuracy of the amount recorded.
  • Every company should have a formal Standard Operating Procedures (SOPs) for its accounts payable department. The auditor should review the SOPs in detail and test a sample of transactions to identify that payables personnel follow them. This is normally to ensure that there is no risk regarding fraud or any inaccuracy of the accounts payable transactions.

Occurrence

Under this section, the auditor perform the audit procedures to ensure and confirm occurrence of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

  • Select sample of invoices and vouchers and then perform the inspection to see if there is proper authorization.

Classification and Understandability

Under this section, the auditor perform the audit procedures to ensure and confirm classification and understandability of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion.

  • The auditors should perform the review the accounts payable listing and then identify if there is any large amount at debit side. If that is the case, it should be reclassified as receivables or deposits depend on its nature. In addition, they should also review to see if there is properly separate disclosure for long-term where it should be.

Accuracy and Valuation

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.

  • This is to ensure the accounts payable balance is properly disclosed in the financial statements. In addition, the auditor should also ensure the financial information is accurate and properly presented at the correct amount.
  • As a final audit procedure the auditor may ask the client’s management to provide a management representation letter confirming that the financial statement appropriately represents the accounts payable and purchase accounts.
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