The Auditor Examins Payment to Vendors Following Year End and Then Reviews Any Open

Accounts payable is usually one of the more important audit areas. Why? Hazard. Commencement, it'southward easy to increase cyberspace income by non recording period-end payables. Second, many forms of theft occur in the accounts payable area.

In this post, I'll answer questions such as, "how should we test accounts payable?" And "should I perform fraud-related expense procedures?" Nosotros'll as well take a look at common payables-related risks and how to respond to them. In short, you will acquire what you demand to know about auditing accounts payable.

Auditing Accounts Payable and Expenses — An Overview

What is a payable? It'southward the corporeality a visitor owes for services rendered or appurtenances received. Suppose the company y'all are auditing receives $2,000 in legal services in the concluding week of December 2019, but the police business firm sends the related invoice in Jan 2020. The visitor owes $2,000 as of December 31, 2019. The services were provided, but the payment was not made until later on the year-finish. Consequently, the company should accrue (tape) the $ii,000 as payable at year-end.

In determining whether payables exist, I like to enquire, "if the company airtight down at midnight on the last day of the year, would it accept a legal obligation to pay for a service or practiced?" If the answer is yes, then record the payable even if the invoice is received afterwards the year-finish. Was a service provided or take goods been received by year-end? If yes (and the amount has not already been paid), accrue a payable.

In this chapter, nosotros will cover the following things an accounts payable accountant need to consider:

• Primary accounts payable and expense assertions
• Accounts payable and expense walkthroughs
• Directional hazard for accounts payable and expenses
• Primary risks for accounts payable and expenses
• Common accounts payable and expense control deficiencies
• Risks of material misstatement for accounts payable and expenses
• Search for unrecorded liabilities
• Auditing for accounts payable and expense fraud
• Substantive procedures for accounts payable and expenses
• Typical accounts payable and expense work papers

So, let'southward brainstorm our journey of auditing accounts payable and expenses.

Primary Accounts Payable and Expense Assertions

The principal relevant accounts payable and expense assertions are:

• Being
• Completeness
• Cutoff
• Occurrence

Of these assertions, I believe completeness and cutoff (for payables) and occurrence (for expenses) are normally most of import. When a company records its payables and expenses by period-cease, information technology is asserting that they are complete and that they are deemed for in the correct period. Additionally, the company is implying that amounts paid are legitimate.

Accounts Payable and Expense Walkthroughs

As we perform walkthroughs of accounts payable and expenses, we are looking for understatements (though they can too exist overstated as well). We are asking, "what can go incorrect?" whether intentionally or by fault.

In performing accounts payable and expense walkthroughs, enquire questions such as:

• Who reconciles the accounts payable summary to the general ledger?
• Does the company use an annual expense upkeep?
• Are budget/expense reports provided to management or others? Who receives these reports?
• What controls ensure the recording of payables in the appropriate period?
• Who authorizes buy orders? Are any purchases authorized by means other than a buy social club? If yes, how?
• Are purchase orders electronic or physical?
• Are purchase orders numbered?
• How does the visitor vet new vendors?
• Who codes invoices (specifies the expense account) and how?
• Are three-fashion matches performed (comparison of purchase order with the receiving certificate and the invoice)?
• Are paid invoices marked "paid"?
• Does the company accept a purchasing policy?
• Can credit cards exist used to bypass standard purchasing procedures? Who has credit cards and what are the limits? Who reviews credit card activity?
• Are bids required for sure types of purchases or dollar amounts? Who administers the bidding process and how?
• Do larger payments require multiple approvals?
• Which employees key invoices into the accounts payable module?
• Who signs checks or makes electronic payments?
• Who is on the bank signature card?
• Are signature stamps used? If aye, who has control of the signature stamps and whose signature is affixed?
• How are electronic payments made (e.g., ACH)?
• Is in that location adequate segregation of duties for persons:
  • Approving purchases,
  • Paying payables,
  • Recording payables, and
  • Reconciling the related banking company statements
• Which persons take admission to cheque stock and where is the check stock stored?
• Who can add vendors to the payables system?
• What are the entity's procedures for payments of travel and entertainment expenses?
• Who reconciles the banking company statements and how oft?

As nosotros ask these questions, nosotros inspect documents (e.g., payables ledger) and make observations (e.grand., who signs checks or makes electronic payments?). So, nosotros are inquiring, inspecting, and observing.

If controls weaknesses exist, we create audit procedures to respond to them. For instance, if--during the walkthrough--we see that one person prints and signs checks, records payments, and reconciles the bank argument, then we volition perform fraud-related substantive procedures (more nigh this in a moment).

Here's a curt video about risk assessment for accounts payable auditors.

Directional Risk for Accounts Payable and Expenses

The directional adventure for accounts payable and expenses is an understatement. Then, perform procedures to ensure that invoices are properly included. For example, perform a search for unrecorded liabilities (see below).

Primary Risks for Accounts Payable and Expenses

The primary risks for accounts payable and expenses are:

1. Accounts payable and expenses are intentionally understated
2. Payments are made to inappropriate vendors
3. Indistinguishable payments are made to vendors

Keep these in mind equally you lot audit accounts payable.

Common Payable and Expense Control Deficiencies

In smaller entities, information technology is common to accept the following control deficiencies:

• One person performs two or more of the post-obit:
• Approves purchases,
• Enters invoices in the accounts payable system,
• Issues checks or makes electronic payments,
• Reconciles the accounts payable bank account,
• Adds new vendors to the accounts payable system
• A 2d person does non review payments earlier issuance
• No one performs surprise audits of accounts payable and expenses
• Bidding procedures are weak or absent
• No one reconciles the accounts payable particular to the general ledger
• New vendors are not vetted for appropriateness
• The company does non create a budget
• No ane compares expenses to the budget
• Electronic payments can exist made by i person (with no second-person approval or involvement)
• The bank business relationship is not reconciled on a timely ground
• When bank accounts are reconciled, no 1 examines the canceled checks for advisable payees (the dollar amount on the banking company statement is agreed to the full general ledger just no ane compares the payee name on the cleared check to the vendor name in the full general ledger)

When segregation of duties is lacking, consider whether someone tin employ the expense bicycle to steal funds. How? Past making payments to fictitious vendors, for instance. Or intentionally paying a vendor twice--and so stealing the second check. (See the section titled Auditing for Fraud beneath.)

Risks of Material Misstatement for Payables and Expenses

In smaller engagements, I usually assess command take a chance at high for each exclamation. When I assess control chance at less than high, I have to exam controls to support the lower adventure assessment. Therefore, assessing risks at high is commonly more than efficient (than testing controls).

When control risk is assessed at high, inherent risk becomes the driver of the risk of fabric misstatement (control risk X inherent risk = risk of material misstatement). The assertions that concern me the virtually are completeness, occurrence, and cutoff. And then my RMM for these assertions is ordinarily moderate to high.

My response to higher hazard assessments is to perform certain noun procedures: namely, a search for unrecorded liabilities and detailed expense analyses. The item expense accounts that I examine are often the result of my preliminary planning analytics.

Search for Unrecorded Liabilities

How does one perform a search for unrecorded liabilities? Use these steps:

1. Obtain a complete bank check annals for the period subsequent to your audit menstruation
2. Pick a dollar threshold ($10,000) for the examination of subsequent payments
3. Examine the subsequent payments (higher up the threshold) and related invoices to determine if the payables are suitably included or excluded from the period-stop accounts payable item
4. Ask about any unrecorded invoices

Equally the RMM for completeness increases, vouch payments at a lower dollar threshold.

How should you perform a detailed analysis of expense accounts? Beginning, compare your expenses to upkeep—if the entity has one—or to prior twelvemonth balances. If yous notation whatever meaning variances (that can't be explained), and then obtain a detail of those detail expense accounts and investigate the cause.

Theft can occur in numerous ways—such as fictitious vendors or duplicate payments. If control weaknesses are present, consider performing fraud-related procedures. When fraud-related control weaknesses exist, appraise the RMM for the occurrence assertion at loftier. Why? There is a risk that the expense (the occurrence) is fraudulent.

So, how should y'all respond to such risks?

Auditing for Fraud

An example of a fraud-related examination is one for duplicate payments. How?

• Obtain a check register in Excel
• Sort past the vendor
• Scan the check register for payments made to the aforementioned vendor for the same amount
• Inquire about payments fabricated to the aforementioned vendor for the same amount

In a duplicate payment fraud, the thief intentionally pays an invoice twice. He steals the 2nd bank check and converts it to cash.

This is just i case of expense fraud. There are dozens of such schemes.

(Come across White Collar Crime is Knocking at Your Door: Are You lot Prepared?)

Substantive Procedures for Accounts Payable and Expenses

My customary audit tests are equally follows:

1. Vouch subsequent payments to invoices using the steps listed above (in Search for Unrecorded Liabilities)
2. Compare expenses to budget and examine whatever unexplained variances
3. When control weaknesses are present, design and perform fraud detection procedures

If at that place are going concern issues, you lot may need to examine the aged payables list. Why? Management tin fraudulently shorten invoice due dates. Doing and so makes the visitor announced more current. For example, suppose the business concern has three unpaid invoices totaling $1.3 million that were due over ninety days agone. The company changes the due dates in the accounts payable organisation, causing the invoices to appear as though they were due just thirty days ago. At present the aged payables listing looks better than information technology would have.

Typical Payable and Expense Work Papers

My accounts payable and expense work papers usually include the post-obit:

• An understanding of internal controls as they chronicle to accounts payable and expenses
• Chance assessment of accounts payable and expenses at the assertion level
• Documentation of any accounts payable and expense control deficiencies
• Accounts payable and expense inspect program
• An aged accounts payable detail at period-end
• A search for unrecorded liabilities work newspaper
• Budget to bodily expense reports and, if unexpected variances are noted, a detailed assay of those accounts
• Fraud-related expense work papers (if significant control weaknesses are present)

So, now yous learned about auditing accounts payable. My next postal service addresses auditing payroll.

In some entities such as governments, payroll makes upward over 50% of total expenses. Consequently, knowing how to audit payroll expenses is of great importance. My next mail is titledThe Why and How of Auditing Payroll. So, stay tuned.

See my prior posts in The Why and How of Auditing.

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Source: https://cpahalltalk.com/auditing-accounts-payable/

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