Lecture-23

Audit of pricing and observation

Observation consists of looking at a process or procedure being performed by others .Auditors
must verify that the physical counts record quantities are correctly priced and observation.
Observation provides audit evidence about the performance of a process or procedure, but is
limited to the point in time at which the observation takes place, and by the fact that the act of
being observed may affect how the process or procedure is performed.

Integrated Test Facility (ITF) Approach

A common form of an ITF is as follows:
1. A dummy ITF center is created for the auditors.
2. Auditors create transactions for controls they want to test.
3. Working papers are created to show expected results from manually processed
information.
4. Auditor transactions are run with actual transactions.
5. Auditors compare ITF results to working papers.

Tests of Detail of Balance of Accounts Payables

An accounts payable is a legal obligation to a creditor, which may be unsecured or secured by
assets.
Existence:
Recorded acquisitions are for items that were acquired: (i) Trace from the accounts payable
listing, (ii) Confirm accounts payable, (iii) Scan voucher register, (iv) Examine underlying
documents for authenticity and reasonableness.
Completeness:
Search for unrecorded liabilities: (i) Proper documents and records, (ii) Examine the documents
underlying invoices not yet recorded, (iii) Using the last receiving report number at the time of
the inventory observation.
Cutoff:
To determine if the transactions are recorded in the correct period.
Obligations:
The client has an obligation to pay: (i) Vendors’ statements, (ii) Confirmations
Accuracy:
Acquisitions are recorded for the proper amounts.
Detail tie-in:
Accounts payable listing agrees with
Classification:
Accounts payable in the listing are properly classified
Presentation and disclosure:
Acquisitions are recorded to result in presentation according to GAAP

Analytical Procedures for Accounts Payable

Compare acquisition-related expense account balances with prior years.
(i) Review list of accounts payable for unusual, non-vendor, and interest bearing payables.
(ii) Compare individual accounts payable with previous years.
(iii) Calculate ratios such as purchase divided by accounts payable, and accounts payable divided
by current liabilities.