Audit of Current Assets

Simply put, an AP audit is an independent and systematic examination of an

organization's accounts payable records. It checks whether your transactions are properly
recorded and whether those recordings present an accurate view of your business. ... Many
financial professionals regard AP audits as a necessary evil.

Auditing Accounts Payable in 4 Steps

Since a lot of money flows through accounts payable (AP), it is important to get it right!
Auditors can help by using four key procedures on AP: reviewing standard operating procedures
(SOPs), analyzing source documents (such as purchase orders, invoices and bank records),
confirming balances with vendors, and comparing the AP ledger to the financial statements.

1. Examination of SOPs

Standard operating procedures (SOPs) are critical to a properly functioning AP department.

However, some companies haven’t written formal SOPs — and others don’t always follow the
SOPs they’ve created.

If SOPs exist, the audit team reviews them in detail. They also test a sample of transactions to
determine whether payables personnel follow them.

If the AP department hasn’t created SOPs — or if existing SOPs don’t reflect what’s happening
in the department — the audit team will temporarily stop fieldwork. Auditors will resume testing
once the AP department has issued formal SOPs or updated them as needed.

2. Analysis of paper trails

Auditors use the term “vouching” to refer to the process of tracking a transaction from inception
to completion. Analyzing this paper trail requires auditors to review original source documents,
such as:
  Purchase orders,
 Vendor invoices,
 Journal entries for AP and inventory, and
 Bank records.

The audit team may select transactions randomly, as well as based on a transaction’s magnitude
or frequency. They’ll also ascertain whether the company has complied with invoice terms and
received the appropriate discounts.

3. Confirmations

Auditors may send forms to the company’s vendors asking them to “confirm” the balance owed.
Confirmations can either:

 Include the amount due based on the company’s accounting records, or

 Leave the balance blank and ask the vendor to complete it.

If the amount confirmed by the vendor doesn’t match the amount recorded in the AP ledger, the
audit team will note the exception and inquire about the reason. Unresolved discrepancies may
require additional testing procedures and could even be cause for a qualified or adverse audit
opinion, depending on the size and nature of the discrepancy.

4. Verification of financial statements

Auditors compare the amounts recorded in the company financial statements to the records
maintained by the AP department. This includes reviewing the month-end close process to
ensure that items are posted in the correct accounting period (the period in which expenses are
incurred).
Auditors also review the process for identifying and recording related-party transactions. And
they search for vendor invoices paid with cash and unrecorded liabilities involving goods or
services received but yet not processed for payment.

Get it right

These four procedures may be conducted as part of a routine financial statement audit — or you
may decide to hire an auditor to specifically target the AP department. Either way, your payables
personnel can help streamline fieldwork by having the formal SOPs in place and source
documents ready when the audit team arrives. Contact us for more information about what to
expect during the coming audit season.

There are three GAAP-specified categories of contingent liabilities: probable, possible, and

remote. Probable contingencies are likely to occur and can be reasonably estimated.

Rules specify that contingent liabilities should be recorded in the accounts when it is probable

that the future event will occur and the amount of the liability can be reasonably estimated. This
means that a loss would be recorded (debit) and a liability established (credit) in advance of the
settlement.

A contingent liability is a probable future cash outflow from any activity. ... On the other hand,
a provision is something that provides for decline in an asset's value such as provision for bad
debts or provision for reduction in value. The value can be more realistically estimated as
compared to contingent liability.

A provision is a liability of uncertain timing or amount. ... If an outflow is not probable, the item
is treated as a contingent liability. A provision is measured at the amount that the entity would
rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third
party at that time.