ACCOUNTS

PAYABLE AND
OTHER
LIABILITIES
PART 1
February 08, 2021
Sources and Nature of Accounts
Payable
- often referred to as vouchers payable for a voucher system
- used to describe short-term obligations arising from the purchase of goods and services in
the ordinary course of business.

Typical transactions creating accounts payable INCLUDE:

 acquisition on credit of merchandise, raw materials, plant assets, and office supplies
 receipt of services, such as legal and accounting services, advertising, repairs, and utilities

Interest-bearing obligations should NOT be included in accounts payable but shown

separately as bonds, notes, mortgages, or installment contracts.

Accrued liabilities (sometimes called accrued expenses) generally accumulate over time,
and management must make accounting estimates of the year-end liability. Such estimates are
often necessary for salaries, pensions, interest, rent, taxes, and similar items.
The Auditors’ Objectives in Auditing Accounts
Payable
1. Understanding of the client and its environment to consider inherent risks,
including fraud risks, related to accounts payable.
2. Obtain an understanding of internal control over accounts payable.
3. Assess the risks of material misstatement and design tests of controls and
substantive procedures that:

 Substantiate the EXISTENCE of accounts payable and the client’s obligation to

pay these liabilities and establish the occurrence of purchase transactions.
 Establish the COMPLETENESS of recorded accounts payable.
 Verify the cutoff of purchase transactions.
 Establish the proper VALUATION of accounts payable and the accuracy of
purchase transactions.
 Determine that the PRESENTATION AND DISCLOSURE of information about
accounts payable are appropriate.
The Auditors’ Objectives in Auditing Accounts
Payable
Primary Concerns - possibility of understatement, or omission, of liabilities.
Primary Objective – determination of the COMPLETENESS of recorded payables

Understatement of liabilities is usually accompanied by the understatement of expenses and an

overstatement of net income.

Audit procedures for detecting understated liabilities differ from those used to detect
overstated assets. Overstating an asset account usually requires an improper entry in the
accounting records, as by the recording of a fictitious transaction. Such an improper entry can be
detected by the auditors through verification of the individual entries making up the balance of an
asset account.

By way of contrast, understating a liability account is generally possible merely by failing to

make an entry for a transaction creating a liability. The omission of an entry is less susceptible to
detection than is a fictitious entry. If the omission is detected, it is much easier to pass it off as an
accidental error.
Internal Control over Accounts Payable
CREDITORS – There will be demand for payment from the creditor’s side.

PURCHASE OR ACQUISITION CYCLE

 Purchase Requisition – Prepared and approved by Inventory Control Department.

 Purchase Order – Orders determined and selected by Purchasing Department.

Triplicate serially numbered P.O. are sent to suppliers, receiving and A.P.
(accounting) department

 Delivery Receipt – “Blind” P.O. are received from P.D. with regard to quantities to
encourage counting/inspection of items received. Copies Invoice and numbered D.R.
are also sent to suppliers, P.D. and A.P.
Internal Control over Accounts Payable
VOUCHING SYSTEM – concrete and solid documentation and evidence of
expenses, capital, and written proof in audits.
JOURNAL VOUCHER CHECK VOUCHER
Recognition Liability Payment
Documentation PRF, PO, Invoice and DR STRICTLY (PRF PO Invoice and
DR) and JV
Approval Accounting Department Treasury/Finance Department

ACCOUNTS RECONCILIATION– monthly balancing of the detailed records

of accounts payable vouchers to the general ledger control account.
VENDOR’S STATEMENTS– also called Statement of Accounts to be
reconciled with AP ledger or list of open vouchers.
Audit Documentation for Accounts Payable
 Lead schedule
 Trial balances
 Confirmation requests

The trial balances are often in the form of computer printouts. In addition, the
auditors may prepare a listing of unrecorded accounts payable discovered during the
course of the audit.

The auditors also will document the controls and risk assessments for accounts
payable.
Audit of Accounts Payable
A. Understanding of the client and its environment

B. Obtain an understanding of internal control

C. Assess the risks of material misstatement and design further audit procedures

D. Perform further audit procedures—tests of controls.

a. Verify a sample of postings to the accounts payable control account.
b. Vouch to supporting documents a sample of postings in selected accounts of the
account's payable subsidiary ledger.
c. Test IT application controls.

If necessary, revise the risks of material misstatement based on the results of tests of
controls.
Audit of Accounts Payable
E. Perform further audit procedures - substantive procedures
1. Obtain or prepare a trial balance of accounts payable as of the balance sheet
date and reconcile with the general ledger.
2. Vouch balances payable to selected creditors by inspection of supporting
documents.
3. Reconcile liabilities with monthly statements from creditors.
4. Confirm accounts payable by direct correspondence with vendors.
5. Perform analytical procedures for accounts payable and related accounts.
6. Search for unrecorded accounts payable.
7. Perform procedures to identify accounts payable to related parties. 8.
Evaluate proper balance sheet presentation and disclosure of accounts payable.
THANK YOU!