Auditing of Accounts Payable | Auditing Course | CPA Exam AUD

In this video, we explain auditing of accounts payable.
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Auditing of Accounts Payable
Accounts payable (A/P) represent a company's short-term obligations to suppliers and creditors. The audit of accounts payable ensures that liabilities are recorded accurately, obligations are properly disclosed, and financial statements fairly represent the company's financial position.
Objectives of Auditing Accounts Payable
Existence & Validity - Ensure recorded liabilities represent actual obligations.
Completeness - Verify that all payables are recorded, preventing understatement.
Accuracy - Confirm correct amounts are recorded.
Cutoff - Ensure transactions are recorded in the correct accounting period.
Classification - Confirm that payables are properly classified as current liabilities.
Rights & Obligations - Verify that recorded payables are obligations of the company.
Audit Procedures for Accounts Payable
1. Understanding Internal Controls
Review purchase approval procedures.
Assess segregation of duties between purchasing, receiving, and payment processing.
Evaluate controls over invoice verification and payments.
2. Analytical Procedures
Compare A/P balances with prior years.
Review days payable outstanding (DPO) trends.
Assess reasonableness of expense ratios relative to sales.
3. Substantive Testing
A. Confirmations
Send direct confirmations to suppliers requesting balance verification.
Used primarily when controls are weak or fraud is suspected.
B. Cutoff Testing
Review invoices received before and after year-end to confirm proper recording.
Examine receiving reports and supplier invoices to ensure they relate to the correct period.
C. Search for Unrecorded Liabilities
Examine subsequent cash disbursements after the balance sheet date to identify missing liabilities.
Review vendor statements for unpaid invoices.
D. Reconciliation Procedures
Compare vendor statements to A/P ledger.
Match recorded invoices to receiving reports and purchase orders.
E. Reviewing Supporting Documentation
Examine invoices for accuracy and proper approval.
Check for duplicate payments or unauthorized expenses.
Common Audit Findings & Risks
Understatement of Liabilities - Companies may omit payables to improve financial ratios.
Fraudulent Transactions - Fake vendors or duplicate payments may indicate fraud.
Incorrect Cutoff - Payables recorded in the wrong period can misstate financials.
Misclassification - Improperly classifying long-term liabilities as short-term.
Conclusion
A thorough accounts payable audit ensures financial integrity by verifying that liabilities are properly recorded, classified, and disclosed. The auditor uses a mix of internal control assessment, analytical procedures, and substantive testing to detect misstatements or fraud. Accurate A/P reporting is essential for maintaining stakeholder trust and financial statement reliability.
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