32-PS_AP - Common Subs Procedures V21
Performance Support—Accounts Payable–Common Substantive Procedures
Accounts payable is money that an entity owes to vendors for goods and services purchased on credit. This item appears on the entity's balance sheet as a current liability, since the expectation is that the liability will be settled in less than a year.
The following performance support details key points and procedures that may need to be performed with regard to common risks identified in the accounts payable Model Audit Program (MAP). Common substantive procedures to address the risks of material misstatement in accounts payable are displayed with additional guidance on certain procedures you may be required to perform.
This performance support provides information to help you perform some of the substantive procedures in addressing the risks of material misstatement in accounts payable. This performance support only provides information on some common substantive procedures and does not address all substantive procedures to address accounts payable risks or other portions of the MAP. Also, the substantive procedures may differ based upon the entity under audit and the risks of material misstatement identified.
For more information, refer to Performance Support–Using the Model Audit Program for any general questions you have on MAP.
This performance support includes the following section. (Click on the link to go to the relevant section within this document).
• SUBSTANTIVE AUDIT PROCEDURES
These are some common substantive procedures used to address risks of material misstatement identified in accounts payable. These procedures are identified during the planning stage of the audit and may change depending on the entity you are auditing and the risks identified.
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Description of planned substantive testing procedures to be performed: |
Additional comments: |
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Obtain the sub-ledger/listing for payables, and test the reconciliation to the general ledger. |
This refers to tying the listing of accounts payable to the figure in the trial balance and thus the draft accounts. If the detail does not agree, we test the reconciling items by obtaining audit support based on what the reconciling items are. |
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Perform tests of details to address the risks identified for the accounts payable balances by completing the following steps: · Perform subsequent cash disbursement testing · Perform unpaid invoice testing · Review the period-end sub-ledger/listing for payables · Calculate the accounts payable turnover ratio (in days) and comparing it to last year |
See below for details on performing: |
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Determine if the following balances, if any, are properly valued: · Old, disputed, or questionable payable amounts. · Purchase commitments. |
· We can identify any old, dispute, or questionable payables by reviewing an aged accounts payable listing. We can also compare the accounts payable detail for the current period end to the prior period end to look for recurring items. · We identify purchase commitments through inquiry of entity personnel, supplier contracts, and by looking for documentation on invoices and purchase orders. |
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Payables owed to selected suppliers: · Reconcile closing balances to statements or purchase invoices received by the entity from the selected suppliers · Prepare or have the entity prepare confirmation requests to address the risk identified for the accounts payable balances · Testing the risks related to reconciliation of the replies, and performing alternative audit procedures for non-replies. For non-replies, examine subsequent cash disbursements to the suppliers and/or unpaid supplier invoices, and receiving records. |
· If a statement is sent to an entity, a supplier statement reconciliation may be performed. It works in a similar manner as a bank reconciliation, but instead of using the bank statement and entity cash figure, it uses the supplier statement received from the third party and the entity’s accounts payable figure for that supplier. · If a statement is not sent to an entity, the ending balance in accounts payable for that supplier should equal all the outstanding invoices at that time less any adjustments given to the entity. · A reconciliation between the supplier’s amount outstanding and the entity’s amount outstanding should set out any differences between the two to reconcile the amounts. These differences could be due to timing, e.g., payment sent after the statement is compiled, or goods received late, or disputes between the entity and the supplier. · Some engagement teams test risks identified in accounts payable using confirmations. For more information, refer to Performance Support–External Confirmations on how to send confirmations, what to do with discrepancies in replies, or if no replies are received. |
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Test the risk related to early cutoff of purchases by selecting purchase invoices recorded after period end. Test the risk related to early cutoff of purchases by selecting initial records of receipts of goods or services that occurred before period end. Test the risk related to late cutoff of debit notes by selecting purchase returns that occurred before and after period end. |
Typically, only one of the first two procedures is chosen for cutoff procedures along with the third. Ask your field senior how many days (and/or transactions) to include before or after period end to address the cutoff risks identified. Details of purchase returns and receipts of goods and services may be a listing of receipts maintained in a warehouse or other function outside of accounting. The population will depend on the nature of the business and how transactions are recorded so, if in doubt, ask your field senior. |
Perform subsequent cash disbursement testing to address risks identified in accounts payable:
• Subsequent cash disbursement testing is selecting a sample of disbursements made after period end and tracing them to the related invoices, receiving reports, or other documentation that supports the need for payment.
• By tracing the payment to the supporting documentation, we determine the period the liability was related to and whether it was recorded in the correct period (i.e., we verify that the liability is recorded in the sub-ledger of the period it relates to).
o For example: If we obtain a payment made on 3 January 2022 for an expense incurred, unless we look at the related invoice (or other supporting documentation of the expense) we will not know when the expense was incurred. If the expense was incurred in December 2021, then we should see a liability recorded at that time until payment was made in January. If the expense was incurred in January, then the liability would be recorded in January and there should not be any records related to December liabilities.
• Since accounts payable is a liability we determine a reciprocal population to test for the risk of understatement identified in accounts payable. Refer to the Performance Support–Risks of Material Misstatements & Assertions for more information on reciprocal populations.
• A reciprocal or independent population is one comprising items that indicate valid current-period transactions that ought to be recorded in the population of audit interest. The reciprocal population for testing the risks related to subsequent disbursements may be subsequent check registers (i.e., a listing of each payment made during a period) or subsequent bank statements.
• Depending on the circumstances, either may be used. Determining which is better is a matter of professional judgment and needs to take into account a consideration as to which reciprocal or independent population is likely to contain valid current-period transactions and also which one is likely to be more complete.
• Ask your field senior if you are not sure on the following two items:
o The population to use for testing (e.g., check register or subsequent bank statement).
o The number of days after the period end to include in your population (e.g., up to the date of fieldwork, or the first 15 days of the month).
Perform unpaid invoice testing to address risks identified in accounts payable:
• Most entities maintain a file of invoices that are unpaid. Unpaid invoice testing consists of testing these invoices by reviewing the information on these unpaid invoices to determine if they relate to the period under audit and that they have been properly recorded either in accounts payables or in accrued expenses.
• Usually all unpaid invoices as of the date of fieldwork are requested and then a sample is selected from that.
• Determining which invoices to select for testing, if a sample is to be used, is a matter of professional judgment. For example, we may decide to look at all invoices greater than a particular amount (which could be a certain percentage of Materiality) or another method may be set for selecting invoices.
• Ask your field senior if you are not sure which invoices you should use for testing the risks identified in accounts payable. Also, ask your field senior when you should perform this testing since this may be one of the last tests in accounts payable you perform.
Unmatched Receiving Report
• Unmatched receiving reports are also used for testing to address risks related to accounts payable. These are reports of goods received but where an invoice has not yet been received. Many times, these reports are prepared by personnel in the warehouse and then sent to the payables personnel to await an invoice. An accrual should be made for these amounts at period end since goods were received before period end.
• Similar to the unpaid invoices, we request all unmatched receiving reports and then select a sample from this file or we may choose to test all items. If amounts are not included on the reports, the entity must estimate the cost of these items and record a liability (usually to a suspense account until the invoice is received). In order to test the risks related to estimates, we normally use a price listing, purchase order, or previous invoices to estimate the cost of the purchase.
SUBSTANTIVE PROCEDURES CONTINUED
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Description of planned substantive testing procedures to be performed: |
Additional comments: |
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Rollforward procedures for risks related to the account balance tested before period end · Inquire into any significant disputed balances since the interim date and review the sub-ledger/listing of account balance as of period end. Perform substantive analytical procedures to test the risk related to the account balance change in the intervening period (i.e., from the interim test date to the balance sheet date). Develop expectations of the account balance change in the intervening period and compare these to the recorded amounts. Perform test of details to test the risk related to the account balance change in the intervening period (i.e., from the interim test date to the balance sheet date) by selecting items from the cash disbursement journal. Perform test of details to test the risk related to the account balance change in the intervening period (i.e., from the interim test date to the balance sheet date) by examining activity within the account balance. |
Rollforward procedures are supplemental audit procedures needed to extend a conclusion from interim dates to the balance sheet date (e.g., testing done in September for a December year-end). For more information, refer to the Performance Support‒Using the Model Audit Program and consult your field senior to determine the nature and extent of work to be performed. This details both approaches to performing roll-forward procedures–substantive analytical procedures and tests of details to address the risks identified. |
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Valuation of Foreign Currency · Inquire and consider all available audit evidence to identify any account balances or transactions denominated in foreign currencies, and trace currency-translation adjustments to the general ledger. · Agree a selection of exchange rate(s) used to independent published records, and perform testing of the translation calculations to address the risks identified. · Determine the impact of foreign-currency hedging contracts or forward cover, if any, on the recorded balance of foreign-currency related balances or transactions. |
For more information, refer to Performance Support--Foreign Exchange FAQ and to Performance Support–Using the Model Audit Program. Discuss with your field senior any balances or transactions that are denominated in foreign currencies and the rates that should be used for testing (e.g., buy rate, sell rate, closing rate, average rates). |
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Test the risks related to whether the related balances are properly presented and disclosed |
For more information, refer to Performance Support–Using the Model Audit Program. The nature of testing will depend on the risk identified, the entity, the industry, and how the engagement team performs this testing. Also check with your field senior as some of these procedures may have already been performed. |
Note that this performance support does not replace the AAM. It should be read in conjunction with the applicable AAM topics, as the manual states the requirements of our audit approach and provides further guidance.
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