Coltrane, CPA, is auditing Jang Wholesaling Company\'s financial statements and
ID: 2444061 • Letter: C
Question
Coltrane, CPA, is auditing Jang Wholesaling Company's financial statements and is about to perform substantive audit procedures on Jang's trade accounts payable balances. After obtaining an understanding of Jang's internal control for accounts payable, Coltrane assessed control risk below the maximum. Coltrane requested and received from Jang a schedule of the trade accounts payable prepared using the trade accounts payable subsidiary ledger (voucher register).Required:
Describe the substantive audit procedures Coltrane should apply to Jang's trade accounts payable balances. Do not include procedures that would be applied only in the audit of related-party payables, amounts withheld from employees, and accrued expenses such as pensions and interest.
Explanation / Answer
The primary concern of accounts payable is understatement, so assessing completeness and valuation and allocation assertions, the following substantive tests can be performed:
1) Cut-off testing - choose invoices before and after the cut-off date (e.g. period year end) to ensure that the liabilities are recorded in the correct financial periods so that liabilities reported cannot be manipulated to be in a certain year e.g. push payables to the next financial year to understate liabilities to meet e.g. debt ratio requirements
2) Search for unrecorded liabilities - choose transactions from the payable ledger system and ask for invoices and evidence of authorization to pay those invoices
3) Examine support for reconciliations of payable and general ledger and investigate any significant reconciling items.
4) Request debt confirmations from the parties that the invoices are due to to ensure the value of the payable is correct, in case they are under reported.
The first two are the main procedures.