Audit procedures are the modest steps that auditors deal with to verify the accuracy of their clients’ balances and accounts. Audit procedures vary for different classes of accounts and by the diversity and description of the client’s business themselves and the risks of the specific accounts that the auditor testing on.
Audit procedures guide the auditors to look at the balances and verify them from different ends to make their opinion on the accuracy of those balances. Therefore, these audit procedures will help the auditor outline any discrepancies.
In this article, we will discuss the risks normally associated with accounts payable, the key assertions, and the auditor procedures that auditors use to test the account payables.
Explaining accounts payables:
Accounts payables are the balances an organization owes to its suppliers or service providers when the company purchases on credit. When suppliers or service providers deliver their products to the organization, the description and prices are intimated in the sales invoices furnished by suppliers.
When the system deals with these invoices internally, they are introduced in the accounts payables ledger. A single accounts payable balance is extracted by accumulating these balances from different suppliers, called the accounts payable balance at the year-end.
Payables accounts are liability balances that will be compensated in the prospective periods to their corresponding creditors. They are posted under the current liability section of total liabilities, have a credit nature, and increase the potential outflows of resources from the organization.
Purpose of applying audit procedures on accounts payables:
Balances in the financial statements are always exposed to associated risks. These risks may be due to fraud or error, which results in the misstatement of those balances.
The auditor applies unique audit procedures to verify the assertions used in the balances, such as existence, rights and obligations, completeness, accuracy, classification, and presentation.
Applying procedures to these assertions will guide the auditor to extract misstatements in payables balances if there are any. Assertions in payables will be explained in structured detail below.
Risks associated with the nature of accounts payables:
There are some universal risks associated with accounts payables. First, human error is inevitable, which results in misstatements due to errors.
This risk is more probable when there is no synchronization in the accounts payables and other associated departments, such as procurement. There is a risk of misstatement in the payables balances because of no segregation of duties in the payables division.
Allocating more human resources to the payables section means there is more domination over the balances. Segregation of duties also reduces misstatements due to fraud.
Accounts payables balances may also be misstated due to fraud or unethical behavior of the client. Fraud may result because of personal perks such as acquiring supplies for higher prices than the original price of the material and then claiming back those perks from vendors.
Unethical behavior means the client may reduce the accounts payables balance by different means to window-dress the balance sheet figures for bright financials. This can be because the client wants to increase the current ratio or other liquidity ratios to impress banks or other financial institutions for resources of finance.
Walkthroughs and tests of control
Walkthroughs and tests of control are important to audit procedures used to evaluate the effectiveness of a company’s internal controls over its accounts payable.
The following are the steps involved in conducting a walkthrough and test of control for auditing accounts payable:
- Understanding the Accounts Payable Process: The first step is understanding the company’s accounts payable process, including its policies, procedures, and controls. This involves reviewing documentation such as the accounts payable policy manual, transaction records, and flowcharts.
- Identify Key Controls: The next step is identifying the key controls in the accounts payable process. These controls may include segregation of duties, authorization of payments, and review of invoices and supporting documentation.
- Perform a Walkthrough: The auditor then performs a walkthrough of the accounts payable process to observe the controls in operation. The auditor should select a sample of transactions to follow through the entire process to understand the control environment.
- Test of Control: After the walkthrough, the auditor performs a test of control to verify that the identified controls are operating effectively. The test may involve reviewing supporting documentation for a sample of transactions, performing a comparison of the vendor master file to supporting documentation, and performing a review of the accounts payable aging report.
- Evaluate Test Results: Once the test of control is complete, the auditor evaluates the results to determine if the controls are operating effectively. Any deficiencies identified during the test of control are communicated to management, and recommendations are made to improve controls where necessary.
- Additional Testing: If the test of control reveals deficiencies in the accounts payable process, the auditor may perform additional testing, such as substantive testing or analytical procedures, to further evaluate the accounts payable balances and transactions.
How and what assertions are tested by audit procedures?
Assertions related to accounts payables that are necessary to be verified are listed below:
On the grounds of audit, testing the assertions related to transactions and balances are necessary to accomplish a fair and quality audit. Enough audit procedures are necessarily applied to analyze these assertions.
Existence is a verification process used to authenticate if the payables figures genuinely exist at the year-end. There are some occasions when the payables balance may be higher than what is presented in the ledger. Some balances may not be payable by the client and hence can be verified by sending confirmations to vendors.
Rights and obligations:
This assertion can be applied to accounts balances in terms of obligations the client holds for those balances. These obligations may include further penalties (obligations) if the client delays the payments. This can be verified by reading the terms and conditions between creditors and the client.
Completeness is the verification of accounts’ payables balances and checking if the general ledger balances are complete according to real payables listings. Sending direct confirmations to vendors will help in verifying these balances.
Verification of accuracy is to find if the totals extracted from individual balances are performed precisely. Recalculations procedures are carried out to audit this assertion.
Classification is the verification of a class of accounts payables. Auditors must see if payables balances are perfectly classified in payables subclasses and if debits and credits are accurately applied.
Presentation in accounts payables means that any unusual figures in the accounts payables should be presented in the notes to the financial statements to support them further by a narration.
Audit Procedures for verification of Payables balances:
As discussed above, misstatements may result because of fraud or error, and the auditor should apply the following audit procedures to verify the year-end balances.
- Applying analytical procedures on payables balances against other periods to check any unusual increase or decrease.
- The auditor should observe the payables balance posting procedure. This will demonstrate to the auditor the efficiency of the controls over this area.
- Compare the current year’s opening balances to the previous year’s audited accounts closing balances to verify that the current year’s accounts are initiated with correct figures.
- Recalculate the figures from the general ledger and the individual vendor’s balances to verify the accuracy.
- Obtain samples for vendors and inspect documentation to check that the correct figures are posted in the system. This procedure leads to knowing the client’s payables posting process.
- Obtain the ledgers sample total balances for vendors and compare them with total balances from the listing to check that factual balances are recorded in the ledger.
- Recalculate the breakup balances of individual vendors to verify the total figures are correctly calculated.
- Comparing the individual payables amounts to their relative expense or purchase figures in the original supporting documents to verify that correct figures are recorded in the payables ledgers.
- Sampling various vendors’ figures from the ledger and checking if their corresponding transactions have occurred for genuine purposes.
- Sending direct confirmations to creditors to verify the amounts owed by the client to their vendors. This third-party confirmation is a highly relied procedure for the auditor.
- Obtaining the nature of payables balances and checking that necessary corresponding disclosure is made in the notes to financial statements.