Audit Accounts Payable

Audit Accounts Payable
Introduction
Accounts payable is usually considered one of the high-risk items in the financial
statements when we audit accounts payable and purchases. This is due
to accounts payable can be a subjective area that leads to misstatement which is
due to fraud or error.
Unrecorded liabilities, expense fraud, and duplicate payment could happen
anytime if there are no proper and strong control procedures in place for
expense and accounts payable.
In the audit of accounts payable, when there is a high risk of fraud, the accounts
payable confirmation is usually performed by sending the accounts payable
confirmation letters to suppliers asking them to fill out information such as all
outstanding invoices, payment terms, payment histories, etc. Other procedures
such as examining supporting documents and reconciling suppliers’
statements are also performed.
Audit Assertions for Accounts Payable

Assertions that we usually need to test in the audit of accounts payable are
included in the following table:
Audit assertions for accounts payable
Accounts payable balances reported on the balance

Completeness sheet include all payable transactions that have
occurred during the accounting period.
Accounts payable balances reported on the balance

Existence
sheet actually exist at the reporting date.
Accounts payable have been recorded in the correct

Valuation amount and their balances reflect the actual economic
value.
The company actually owes a liability for accounts
Rights and obligation
payable as at reporting date.
Accounts payable are properly classified on the

Presentation and disclosure balance sheet and disclosed in the notes to the
financial statements.
In the accounts payable audit, the completeness assertion is the most relevant
assertion as the understatement of accounts payable is our major concern. This
may be due to an intentional act of account manipulation or fraud tends to make
accounts payable understated rather than overstated.
Risk of Material Misstatement for Accounts

Payable
Risk of material misstatement refers to the risk that material misstatement can
occur on the financial statements and internal control procedures cannot prevent,
detect or correct the misstatement. Risk of material misstatements consists of
inherent risk and control risk.
In this case, risk of material misstatement for accounts payable is the risk that
accounts payable can be materially misstated and the related control procedures
cannot prevent or detect such misstatement.
Inherent Risk of Accounts Payable
Inherent risk is the risk that is related to the nature and complexity of the
business’s transactions. It is the susceptibility of account or balance to
misstatement. Likewise, inherent risk of accounts payable is the susceptibility of
accounts payable to misstatement.
Inherent risk of accounts payable is the risk that accounts payable may contain
material misstatement regardless the related control procedures that the
company has in place.
The primary inherent risk of accounts payable is usually related to the
completeness of accounts payable, in which the accounts payable may be
understated. For example, the management of the company may not want to
record the liability and related expenses. Hence, payables and related
transactions may be omitted.
There is also a risk that the company may delay the recording of payables and
their related expenses to the period after year-end when they should be recorded
in the current period. This also leads to the understatement of accounts payable.
This is why when performing the audit test on accounts payable and related
expenses, we usually perform the audit procedure of search for unrecorded
liabilities e.g. by examining unrecorded invoices and the subsequent payment of
accounts payable.
Control Risk of Accounts Payable
Control risk is the risk that the company’s internal control procedures cannot
prevent or detect material misstatement that can occur on financial statements.
In this case, the control risk of accounts payable is the risk that accounts payable
related control procedure cannot prevent or detect material misstatement.
Control risk of accounts payable is high if the company does not have effective
control in place or the related personnel that operates the control procedures do
not perform their work properly.
If the company has proper internal control procedures related to accounts

payable in place, we can assess control risk as low and perform test of controls
for accounts payable to obtain evidence to support our assessment.
As the risk of material misstatement is the combination of inherent risk and

control risk, the strong and effective internal control can reduce the level of risk
of material misstatement for accounts payable.
For example, monthly reconciliation of supplier statements to relevant payables

is a primary internal control procedure that can help to ensure the completeness
of accounts payable. Hence, it helps to reduce the risk of unrecorded liabilities
either due to error or fraud.
Test of Control on Accounts Payable

The internal controls for account payable are directly linked to the client’s internal
controls of the purchases. Usually, the control procedures of authorization and
the segregation of duties are very important in almost all areas in the client’s
internal control, especially in the purchases and accounts payable procedures.
Likewise, test of controls for accounts payable is usually performed with those of
purchases and expenses. However, the primary risk is that accounts payable is
material understated. Hence, the primary internal control procedure of accounts
payable is the procedure that can ensure completeness of accounts payable.
In this case, the main control for accounts payable that we want to check with the
client is the reconciliation of the account payable balances with supplier
statements. This type of internal control can help to ensure the completeness of
accounts payable.
If the client performs this control either monthly or yearly, we can perform
the test of control for accounts payable here by examining and evaluating the
client’s procedures of performing these reconciliations. In this case, we can
perform this test by reperforming the monthly reconciliation of supplier
statements to relevant payables in the accounting record.
Additionally, we usually examine the reconciliation report to ensure that it is done
by independent personnel and is properly reviewed. This is to evaluate the
effectiveness of control procedures of accounts payable reconciliations, so that
we may be able to place reliance on the client’s accounts payable reconciliation
procedures.
Otherwise, if there are no reconciliations done by the client, we will need to

perform this task by comparing supplier statements with year-end accounts
payable balances in the substantive procedures to ensure completeness.
Usually, we perform test of controls when we intend to rely on internal control

and we believe that such control procedures can reduce the risk of material
misstatement.
As mention above, completeness assertion is the most relevant assertion in the
audit of accounts payable; hence we usually assess the importance of internal
control concerning the completeness of accounts payable.
Audit Procedures for Accounts Payable

Usually, our main concern regarding the misstatement that could occur on
accounts payable is the understatement of accounts payable as the fewer
liabilities the company has the better it looks. Hence, in substantive procedures
to gather audit evidence on accounts payable, we usually place our attention
more on the area that exposes to the high risk of understatement of accounts
payable.
Substantive audit procedures for accounts payable may include both

substantive analytical procedures and test of details. The nature and extent of
both tests are directly related to the level of risk that the client’s accounts payable
are exposed to.
If there is a low risk in this area, we may limit the test to substantive analytical
procedures only; otherwise, we need to perform further work with the test of
details.
Analytical Procedures in Audit of Accounts

Payable
To audit accounts payable, analytical procedures can be performed as a high-
level review. This can be done by looking at the trend and ratios of the accounts
payable to see if there is any significant fluctuation that we should take note of
and make further investigation.
Comparing payable balance at the current year to the previous year is the
procedure to test the reasonableness of the changes. We also calculate the ratios
of accounts payable’ turnover and account payable days then compare them to
the previous year and the industry data.
In normal cases, the ratios shouldn’t be much different from the previous year;
hence, we should expect the accounts payable’ turnover and account payable
days to stay around the same as the previous year. Therefore, we usually need to
investigate further if there is a significant difference in the result.
Test of Details in Audit of Accounts Payable

Completeness
For the audit of accounts payable, we test completeness assertion 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, we can ensure
the assertions of completeness, existence, and valuation.
Existence
When we perform accounts payable audit, we test the existence assertion 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
Valuation
In the audit of accounts payable, we test the valuation assertion to ensure that
the payable balances are mathematically correct. The objective here is to make
sure that payable balances are accurate.
We can test them by selecting a sample of payable accounts and agreeing them
to the supporting documents such as purchase orders and suppliers’ invoices.
Additionally, reconciliation between a sample of suppliers’ statements and
payable accounts also ensure valuation.
Rights and obligation
We test right and obligation assertion to see whether the client actually has
liability for accounts payable reported. Likewise, we can test this assertion by
vouching a sample of payable accounts to supporting documents.
In this area, we should also examine the long-term contracts that the client has
with its suppliers. 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, we need to see if there are any
penalties involved.
It is useful to note that when selecting a sample for reconciliation of suppliers’

statements, selecting only large balances or those with many transactions are not
considered appropriate. Those with small and zero balances should be included
in the sample to ensure the understatement of liabilities is properly tested.

Audit Accounts Payable

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Audit Accounts Payable

Audit Assertions for Accounts Payable

Audit assertions for accounts payable

Accounts payable balances reported on the balance

Accounts payable balances reported on the balance

Accounts payable have been recorded in the correct

Accounts payable are properly classified on the

Risk of Material Misstatement for Accounts

Inherent Risk of Accounts Payable

Control Risk of Accounts Payable

If the company has proper internal control procedures related to accounts

As the risk of material misstatement is the combination of inherent risk and

For example, monthly reconciliation of supplier statements to relevant payables

Test of Control on Accounts Payable

Otherwise, if there are no reconciliations done by the client, we will need to

Usually, we perform test of controls when we intend to rely on internal control

Audit Procedures for Accounts Payable

Substantive audit procedures for accounts payable may include both

Analytical Procedures in Audit of Accounts

Test of Details in Audit of Accounts Payable

Example: tests of completeness in accounts payable audit include:

When we perform accounts payable audit, we test the existence assertion to

Example: tests of existence in accounts payable audit include:

Rights and obligation

It is useful to note that when selecting a sample for reconciliation of suppliers’

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