What are Accounts Payable?
Accounts Payable can be defined as the owing that is made to the creditors against the goods and services that are procured by the company. Accounts Payable is categorized as a Current Liability since this is the amount that needs to be paid back to the creditors within the time frame of less than 12 months.
In this regard, it is important to consider the fact that accounts payable mostly includes payments for goods and services that are purchased by the company with the intention of either reselling or as raw materials for other related goods and services.
From an auditor’s perspective, it is important to make sure of the fact that accounts payable is properly audited since it is a line item with a relatively higher risk. This amount is presented as a clubbed amount in the financial statements, and therefore, auditors need to inspect separate accounts in order to ensure that there is no material misstatement in the accounts presented.
Auditing Accounts Payable
There are four main steps that need to be inculcated when it comes to auditing accounts payable. These steps include four major assertions that need to be tested in order to ensure that the auditors are able to gather reasonable and substantial evidence based on which they can estimate the reliability of the data set involved.
There are four major auditing assertions that need to be tested during an audit process.
Accounts Payable is an obligation that is incurred on companies in terms of settling the amount that is due by the companies in lieu of the purchase of goods and services. The auditors are supposed to ascertain if accounts payable is included properly so that neither of vital details are missed out upon.
Therefore, in order to test the assertion for completeness, auditors carry out cut-off tests for purchases, as well as for cash payments for goods and services that are received and duly calculated.
For instance, companies are supposed to show their year-end financial statement cut-off tests for purchases, as well as for cash payments that are due at the end of the respective year so that the users of the financial statements have clarity regarding the details that are mentioned in the financial statements.
Auditors also need to check for the validity of the accounts payable transactions at the end of every year. In this regard, the auditor mostly establishes the legitimacy of transactions by reaching out to new vendors and suppliers to get a confirmation request.
Therefore, what auditors essentially need to check is the number of vendors, as well as specific suppliers, and vendors if they actually exist on the payroll of the company.
Auditors mostly get in touch with the partners, in order to determine, and ascertain if the suppliers actually do exist on the payroll of the company and if there is any more information that needs to be included in this regard.
When testing the auditing assertion for compliance, auditors mostly determine if all the procedures, as well as records and stuff, were kept and maintained with the prescribed compliance-related features.
Audits in this regard mostly start off backward with year-end financial statements like Balance Sheets, Income Statements, as well as Cash Flow Statements. Using this, they trace the procedure all the way back to the destination path, and that is then used in order to confirm that the records have been prepared with proper compliance in play.
The final step that is incurred in the disclosure-related process pertains to the auditor ensuring that all the information is properly disclosed and presented in the financial statements.
Therefore, the auditor is required to ensure that all financial statements parameters are properly inspected, and duly verified so that all the relevant and complete information is properly mentioned in the financial statements. This includes several different aspects, ranging from complete disclosure of the financial statements to the information that is presented in the Balance Sheet, which can be used as information pointers for the auditors.
The overall process of audit is designed in order to ensure that the overall shareholder risk is minimized to a maximum extent. However, regardless of the specifically designed audit procedures, there are still a couple of uncontrollable risks that are associated with the audit process, since these risks impact the overall impact of the audit process in a stringent manner.
As far as Accounts Payable Audit is concerned, it can be seen that it is considered to be a high-risk process in the company since the inherent risk is relatively higher in the company. This is essential because of the reason that the accounts payable process include numerous different aspects that need to be checked for by the company.
In this regard, the main purpose of the auditor is to lower the risk associated with a material misstatement that occurs resulting from the material misstatements in the financials of the company.
As far as the Risk of Material Misstatement is concerned, it can simply be defined as the risk that of line items being significantly deviant from the actual figures in the financial statements.
Therefore, it is the responsibility of the auditor to consider the fact that the risk of material misstatement is fully and properly included in the financial statement affairs. Furthermore, an explanation of the risks associated with Accounts Payable Audit is provided below:
Inherent Risk can be defined as the process of accounts payable being audited audit pertains to the exposure of account payable figures towards material misstatement.
For the audit of Accounts Payable, the level of inherent risk is also directly dependent on the nature of the business, in addition to the complexity of the transactions that take place. An example of inherent risk in accounts payable would be mixing up both, accounts payable as well as creditors.
As far as the Control Risk of accounts payable is concerned, it mainly results from the failure of the internal controls to detect the inherent risk. In this regard, accounts payable might be in a position to severely undermine the financial position of the company. Therefore, control risk tends to play a very important role when it comes to accounts payable.
Audit Procedures for Auditing Accounts Payable
The Audit Procedures that are adopted by auditors when auditing accounts payable can be broadly categorized into two:
- Test of Internal Controls
- Substantive Audit Testing
Test of Controls
As far as the Test of Controls is concerned, it can be seen that test of controls is mainly undertaken in order to gauge the overall effectiveness of the audit process of the company.
This is something that auditors undertake after a subjective assessment of what needs to be covered, as well as other relevant areas that need to be addressed pertaining to the audit process itself. Therefore, a test of controls is executed using the following aspects:
- Inquiring the client and the staff’s reaction with respect to the internal control processes
- Observing actual implementation of the internal control processes
- Inspecting supporting documents to ensure that proper controls are in place
- Re-performing how internal controls have been performed by the accountants at the engagement partner.
Substantive Audit Testing
Substantive Audit Testing can be broadly segregated into two parts:
- Substantive Audit Testing for Analytical Procedures
- Test of Details for Revenue
Substantive Audit Testing mainly includes inspection and observation undertaken by auditors in order to ensure that proper trends have been inculcated in the existing system.
On the other hand, the Test of Details for Revenue mostly includes testing for various different assertions in order to ensure that all these assertions have been duly incorporated.