Ways to Conduct an Accounts Payable Audit

Ways to Conduct an Accounts Payable Audit

In an internal audit (Also see Types of Audit – Eligibility Audits), the accounts payable audit can be the only focus or a significant portion of the full audit. Generally, the audit strategies for accounts payable audit has not much difference compared to other audits. However, the reasons for having an accounts payable audit have no impact on the strategies used in that audit as the auditors decide on those strategies based on the fraud risk assessment standard.

The primary purpose of having an accounts payable audit is to ensure that a company does not understate or overstate its accounts payable. When the internal auditors or the auditors from audit firms in Johor Bahru are conducting the audit, they need to make sure that the company have calculated and recorded the invoices, statements and other accrued expenses and liabilities properly.

Completeness

The audit processes about completeness satisfy one of the essential audit objectives. Also, it is of utmost importance in the accounts payable audit.  For the auditors to examine whether a company has done the calculations and documentation correctly, they may carry out procedures such as audit trails, reconciliations (Also see Introduction to Bank Reconciliation), as well as cutoff tests. Audit trails help in tracing and matching the recorded payables to the company’s payments. In this process, the auditors will focus on those open files that do not have matching documents. Besides, reconciliation procedures enable the auditors to identify if the general ledger’s summary figures and the accounts payable ledger transactions match each other. Furthermore, the auditors perform cutoff tests for cash disbursements and purchases to determine whether the business has included the transactions for a particular fiscal year (Also see The Differences Between Calendar Year and Fiscal Year) in the year-end financial statements.

Validity

The purpose of performing audit procedures about validity is to set up the legitimacy of accounts payable transactions. The auditors can achieve this by trying to communicate with the suppliers and vendors with transaction confirmation requests. As the type of business varies, the number and which suppliers and vendors who receive the request may be different. However, in most cases, the auditors will send that request to all regular suppliers and vendors of the company no matter whether there is a balance due currently. Moreover, the auditors may reach out to some occasional business partners when they found out that there are open invoices as they go through the records.

Compliance

The transactions for accounts payable of a company must comply with the applicable accounting standards. When the auditors audit for compliance, they can identify whether the accounting procedures of the company follow those standards. In most cases, the auditors will perform their work backwards, that is, they will start from assessing its year-end financial statements, which includes cash flow statement, income statement, as well as balance sheet. Then, they will pick some entries randomly from the general ledger before tracing back to their sources. This tracing will create an audit trail which enables the auditors to assess the pathway that the transactions have taken for them to examine the accounting procedures.

Disclosure

In the final step of the process of accounts payable audits, the auditors need to make sure that the company has disclosed the accounts payable balance properly in its year-end financial statements. The auditors may accomplish this step by performing the verification of financial statements. For instance, the auditor will make sure that the company has included its purchases in the calculation of the cost of goods (Also see Understanding Cost of Goods Sold), and it has listed its accounts payable as current liabilities. Besides, auditors need to pay attention to the footnotes, which give details about unusual transactions that probably need more explanation rather than a simple record. The last method that the auditors may implement to verify full disclosure is the review of a management representation letter which serves as clear evidence that the financial statements of the company have disclosed the purchases figures and accounts payable fully.

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