Handout01B - Audit of Accounts Payable and Notes Payable.pdf

AUDITING AND ASSURANCE APPLICATION 2 Handout-01B Audit of Accounts Payables and Notes Payable EPC AUDIT OF ACCOUNTS PAYABLES AND NOTES PAYABLE Aud...

AUDITING AND ASSURANCE APPLICATION 2 Handout-01B Audit of Accounts Payables and Notes Payable EPC AUDIT OF ACCOUNTS PAYABLES AND NOTES PAYABLE Audit Objectives for Liabilities: 1. All liabilities on the balance sheet are real debts due to suppliers or other creditors of the entity for goods received or services performed. 2. All liabilities owed by the entity at the balance sheet date are included on the balance sheet. 3. Accounts payable are stated at the amounts owed at the balance sheet date. 4. The accounts payable in the balance sheet represent obligations of the entity at the balance sheet date. 5. Accounts payable are properly classified, described and disclosed in the financial statements, including notes, in conformity with prescribed accounting principles. Substantive Procedures: Audit Program for Trade Payables Assertions Audit Procedures Completeness SL – GL Reconciliation Determine that all 1. Obtain the subsidiary ledger for trade payables. transactions relating to 2. Obtain the trial balance amount for trade payables. payables have been 3. Compare the amounts per subsidiary ledger and trial balance. properly recorded. 4. Note and investigate significant differences, if any. Cut-Off Testing 1. Obtain schedule of the purchases and disbursements before and after cutoff date. 2. Select samples from the schedule and request for the supporting documents. 3. Inspect the supporting documents if the transactions are recorded in the proper period. 4. Trace the transaction from the supporting documents to the purchase journal and cash disbursement journal. Search for Unrecorded Liabilities 1. Obtain subsequent disbursements. 2. Match the subsequent disbursement with the vendor’s invoice to the initial entry. 3. Examine and assess the correctness of the recording in the proper accounting period. If the subsequent disbursement pertains to transactions that should be recorded as of cut-off date, but is recorded subsequently instead, the unrecorded liability should be recorded as of cut-off date. Existence Test of Subsequent Payments Determine that payables 1. Obtain trade payable schedule before and after the cut-off date. exist as of the statement 2. Compare the balances in the schedule based on the reference number. If the of financial position date. invoice number is present before the cut-off date and is not anymore found after, it is an indication that the liability has been paid. 3. Obtain the proof of payment to check that the liability before cut-off date is indeed existing. Test of Details of Trade Payables 1. Obtain schedule of trade payables for the year. 2. Select samples of trade payables. 3. Inspect and vouch the supporting documents such as invoice or billing statement. 4. Trace the transaction in the books of accounts. Confirmation of Major Balances of Trade Payables 1. Obtain the list of major suppliers and the outstanding trade payables for each. 2. Prepare and send a confirmation letter. 3. Compare the balances per confirmation and the balance per schedule. 4. Note and investigate significant differences, if any. (continued) 1|P age “Every liability is just an asset hiding.” – Mark Victor Hansen  AUDITING AND ASSURANCE APPLICATION 2 Handout-01B Audit of Accounts Payables and Notes Payable EPC Valuation and Accuracy Test of Valuation Determine that payables 1. Obtain schedule of trade payables in foreign currency. are recorded at the 2. Perform an independent translation for the transactions using the closing rate. proper amount. 3. Compare the computed amount with the amount recorded per books. 4. Note and investigate significant differences, if any. Rights and Obligations 1. Check on the documents obtain if the company is the payor. Determine that payables 2. Examine subsequent payments to creditors. represent valid and legal claims of third parties from the client. Presentation and 1. Check whether the trade payables are properly presented in the financial Disclosure statements. This should be included under current liabilities. Other disclosures Determine that payables should also tackle trade payables as part of the financial liabilities. are presented and 2. Obtain client’s representation letter. disclosed in accordance 3. Investigate and reclassify significant debit balances. with the applicable reporting standards. Notes Payable Assertions Audit Procedures Completeness 1. SL – GL Reconciliation 2. Obtain the schedule of notes payable and match the principal amount with the balance per books. 3. Obtain promissory notes and match the amounts in the listing of notes payable and balance per books. Existence 1. Vouch new promissory note during the year. 2. Confirmation of balances Accuracy 1. Test of valuation for foreign-currency denominated transactions 2. Recomputation of interest expense and carrying amount of notes payable. Rights and Obligations 1. Check on the documents obtain if the company is the payor. 2. Examine proper authorization from the management or appropriate personnel assigned. Disclosure Check whether the notes payable is properly presented in the financial statements. This should be included under current liabilities. Other disclosures should also tackle notes payable as part of the financial liabilities. 2|P age “Every liability is just an asset hiding.” – Mark Victor Hansen