Accounts Payable Audit procedures are quite different from the testing of other liability account balances. The population is from the period outside the period under audit.
Read on further to understand those procedures.
Accounts Payable is a liability recorded in the financial records against purchase of goods or services received. Running business involves huge monetary transaction and every time business might not have all the sufficient cash at bank to pay in full (without any credit). So, credit is provided by the Suppliers of goods or services provider. Hence, this result in recording of liability in the company books.
Trade Payables are nothing but the accounts payable relate to trading business.
Refer to this Accounts Payable article to have a detailed understanding of Trade Payable, Non-Trade Payable and their differences.
Accounts Payable Audit Procedures:
Accounts Payable is tested for the following assertions:
- Valuation and Allocation
Let’s see the testing of how each of these assertions.
1. Existence, Valuation & Obligation:
The audit team requests for the Accounts payable Sub Ledger Population from the client and perform the sampling procedures.
For the sample selections, the auditor needs to obtain supporting documents such as Invoice, PO and Payment details.
The auditor compares and confirms the vendor details per sample with the invoice and supporting documents to verify the existence. If we can get the confirmation of Vendor’s existence, that is the conclusive evidence of obligation assertion.
Additionally, the auditor needs to pay attention to the amounts. Comparison of the amount per sample with invoice needs to be performed. This step helps in confirming that the AP balances are not recorded incorrectly. Hence, these three assertions are tested together.
Note: The above steps are relevant for performing test of details, just that the supports are different.
Accounts Payable has the risk of understatement. So, auditor performs testing for unrecorded liabilities. Types of testing:
1. Uncleared Invoices testing
2. Subsequent period testing
For performing above mentioned 2 testing procedures, auditor need to request population based on payable cycle days. Refer to this article for understanding the Payable cycle calculation.
Obtain the Subsequent Disbursement Population for the Credit period. The credit period is nothing but the payable cycle.
Let’s say the Payable Cycle is 45 days, and assume the period under audit is January 1, 2021, to December 31, 2021. The audit team shall request the subsequent disbursement population for January 1, 2022, to February 14, 2022 (Population period is next to the period-end).
The audit team will be applying the sampling procedures and arrive at selections for testing. Refer to the Performance Materiality article for understanding the sampling procedures.
All the supporting documents like invoice, purchase order, payment details and any other supporting documents (like Receiving department Goods receipt note) need to be requested from the client.
Now that we have all the ingredients for our testing, let’s dive into the main section of auditing subsequent disbursements.
For instance, think of a selection which is the payment of $40,000 to the vendor ABC on January 15, 2022. We requested all the supports mentioned above.
The audit team verifies the service period from the invoice. Here service period means the period to which the invoice relates. Let’s assume the above transaction relates to the security contract payments for the services received in Dec 2021. So, the service period relates to the period under audit. (Assuming the Audit period as of January 1, 2021, to December 31, 2021).
We need to check if this transaction is appropriately included in the Accounts Payable balance as of December 31, 2021. This is because the transaction payment is made after the period end. So, the liability shall be accounted for during the period under audit and should have been unpaid as of 12/31/2021.
Uncleared Invoice Testing (or) Open invoice testing :
An uncleared Invoice is an Invoice that is not cleared for payment by the entity. Open invoices or unpaid invoices are interchangeable synonyms for this. Uncleared invoice population is requested as of date. If the credit period is 45 days and the audit period is 01/01/2021 to 12/31/2021, then an uncleared invoice population as of 02/14/2022 is obtained.
Obtain an invoice that is open as of 02/14/2022.
Note that the population period for subsequent disbursement and uncleared invoice testing is different. The former one is for a period range, and the latter one is as of date.
Let’s consider the same facts from the above example here. However, the population obtained is as of 02/14/2022. Assume an open invoice transaction amounting to $55,000 is our selection.
We noted that the service period relates to 2021 (Period under audit) based on supports(invoice) obtained. If the Invoice stands open as of 02/14/2022 and relates to 2021, it should have been unpaid as of 12/31/2021. To confirm, if this transaction relates to 2021, then the audit team verifies by checking this transaction in the AP Sub Ledger.
Uncleared Invoice testing
What are the other synonyms for uncleared invoice testing?
Unpaid invoice testing or open invoice testing
How about a practical insight here?
Considering the timing of the audit, the audit team performs this testing in two phases. For example, consider the credit period as 45 days. The audit team decides to perform testing for the first 30 days and the next 15 days separately.
AP testing is the area where the audit needs to wait longer to complete the testing. That’s because the population period is after 30 days or 45 days from the year-end. The time available to complete this AP testing is significantly less. So, the audit team conducts the testing in two waves. This example shows the first wave after 30 days (i.e., after Jan month) and the second after the next 15 days.
If the number of samples is 45, then testing all 45 after the credit period will take at least 3-4 days (Assuming some time for client follow-ups or clarification and multiple reviews). If it’s done in two waves, then at least the first wave, being the substantial period, is done before the second wave. So, this saves some time.
Auditing Accounts Payable has a different approach in comparison with the other account balances in the balance sheet. The two testing procedures here are Subsequent disbursement and open invoices testing. Both the population relates to the period after year end. The catchy thing here is to calculate the credit period and request population based on that. Along with these procedures, its advisable to perform the reconciliation of AP Sub Ledger with the General Ledger for completeness. Therefore, accounts payable testing involves three different procedures.