Test of Details of Balances Accounts Payable | Auditing and Attestation | CPA Exam

IN this session, I will discuss test of details balance for accounts payable.
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The difference in emphasis in auditing assets and liabilities results directly from the legal liability of CPAs. If equity investors, creditors, and other users determine subsequent to the issuance of the audited financial statements that earnings and owners’ equity were materially overstated, a lawsuit against the CPA firm is fairly likely.
Out-of-Period Liability Tests
Because of the emphasis on understatements in liability accounts, out-of-period liability tests are important for accounts payable. The extent of tests to uncover unrecorded accounts payable, often called the search for unrecorded accounts payable, depends heavily on assessed control risk and the materiality of the potential balance in the account. The same audit procedures used to uncover unrecorded payables are applicable to the accuracy objective. The following are typical audit procedures:

Examine Underlying Documentation for Subsequent Cash Disbursements
Auditors examine supporting documentation for cash disbursements subsequent to the balance sheet date to determine whether a cash disbursement was for a current period liability. If it is a current period liability, the auditor should trace it to the accounts payable trial balance to make sure it is included. The receiving report indicates the date inventory was received and is therefore an especially useful document. Similarly, the vendor’s invoice usually indicates the date services were provided.
Examine Underlying Documentation for Bills Not Paid Several Weeks After the Year-End
Auditors carry out this procedure in the same manner as the preceding one and for the same purpose. This procedure differs in that it is done for unpaid obligations near the end of the audit rather than for obligations that have already been paid.
Trace Receiving Reports Issued Before Year-End to Related Vendors’ Invoices
All merchandise received before the year-end of the accounting period should be included as accounts payable. By tracing receiving reports issued up to year-end to vendors’ invoices and making sure that they are included in accounts payable, the auditor is testing for unrecorded obligations.
Trace Vendors’ Statements That Show a Balance Due to the Accounts Payable Trial Balance.
If the client maintains a file of vendors’ statements, auditors can trace any statement that has a balance due at the balance sheet date to the listing to make sure it is included as an account payable.

Send Confirmations to Vendors with Which the Client Does Business
Although the use of confirmations for accounts payable is less common than for accounts receivable, auditors use them occasionally to test for vendors omitted from the accounts payable list, omitted transactions, and misstated account balances. Sending confirmations to active vendors for which a balance has not been included in the accounts payable list is a useful means of searching for omitted amounts.
Accounts payable cutoff tests are done to determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period. The five out-of-period liability audit tests we just discussed are all cutoff tests for acquisitions, but they emphasize understatements.
Relationship of Cutoff to Physical Observation of Inventory
In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the physical observation of inventory.
The cutoff information for acquisitions should be obtained during the physical observation of inventory. At that time, the auditor should review the procedures in the receiving department to determine that all inventory received was counted, and the auditor should record in the audit documentation the last receiving report number of inventory included in the physical count. Subsequent to the physical count date, the auditor should then test the accounting records for cutoff. The auditor should trace the previously documented receiving report numbers to the accounts payable records to verify that they are correctly included or excluded.
Inventory in Transit
In accounts payable, auditors must distinguish between acquisitions of inventory that are on an FOB destination basis and those that are made FOB origin. For FOB destination, title passes to the buyer when the inventory is received, so only inventory received on or before the balance sheet date should be included in inventory and accounts payable at year-end.