Accounts payable refer to the amount a company owes to its suppliers for goods or services it has received but has not yet paid for. In this article, we will cover the accounting treatment, audit risks, audit assertions, and audit procedures for auditing accounts payable.
Accounting Treatment: Accounts payable are recorded as a liability in the balance sheet and are typically classified as short-term liabilities. The liability is recognized when the company receives goods or services from a supplier and receives an invoice. When the company pays the invoice, the liability is reduced, and cash is decreased.
The following are the audit risks that auditors should consider when auditing accounts payable:
- Misstatement of Accounts Payable Balance: There is a risk of misstatement in the accounts payable balance due to errors in recording or classifying transactions, incorrect calculation of amounts owed, or fraud.
- Unrecorded Accounts Payable: There is a risk that some accounts payable may be unrecorded, which can result in an overstatement of the company’s assets and a corresponding understatement of liabilities.
- Cutoff Misstatement: There is a risk of cutoff misstatement, meaning that some accounts payable transactions may be recorded in the wrong period, which can impact the accuracy of the financial statements.
- Inadequate Internal Controls: There is a risk that internal controls over accounts payable may be inadequate, which can increase the risk of misstatement and fraud.
The following are the audit assertions that auditors should consider when auditing accounts payable:
- Existence: The auditor should verify the existence of accounts payable and the accuracy of the amounts owed.
- Valuation: The auditor should verify that the accounts payable are accurately valued and recorded at the correct amount.
- Rights and Obligations: The auditor should verify that the company has the right to receive the goods or services for which it owes payment and that it has the obligation to pay the accounts payable.
- Presentation and Disclosure: The auditor should verify that accounts payable are presented and disclosed in accordance with accounting standards.
The following are the audit procedures that auditors should perform when auditing accounts payable:
- Obtain an understanding of the company’s internal controls over accounts payable.
- Perform substantive testing, such as examining invoices, purchase orders, and receipts, to verify the existence and accuracy of accounts payable.
- Perform analytical procedures, such as comparing accounts payable balances to prior periods, to identify unusual transactions or trends.
- Verify the accuracy of accounts payable cutoff by performing tests of transactions that occurred near the end of the period.
- Confirm accounts payable with suppliers to verify the accuracy of the amounts owed.
Auditing accounts payable is a critical component of the financial statement audit. Auditors should consider the accounting treatment, audit risks, audit assertions, and audit procedures when auditing accounts payable to ensure the accuracy and reliability of the financial statements.