 in this presentation we will take a look at tests of details transactions related to the accounts payable cycle so the accounts payable cycle test of details transactions looking at the assertion of completeness assertion of completion first a word from our sponsor well actually these are just items that we picked from the youtube shopping affiliate program but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you these are things that we actually researched purchase and use ourselves acer 27 inch monitor i've been using an acer monitor as my primary monitor for a few years now this is the first acer monitor that i have used after having used a series of different brands of monitors in the past the acer monitor has been performing well and i'm trusting the acer brand more and more as i use the monitor i have a 27 inch monitor which i think is ideal for what i do which is of course the screen recording and the editing if you would like a commercial free experience consider subscribing to our website at accounting instruction dot com or accounting instruction dot think of it dot com where we have many different courses you can purchase one at a time or have a subscription model giving you access to all the courses courses which are well organized have other resources like excel files and pdf files to download and no commercials the auditors auditors should conduct a search of unrecorded liabilities that include the following so completeness of course being that assertion that we want to make sure that everything that should have been recorded is recorded in other words are the end results done in the financial statements is everything on the financial statements are they complete in other words are there transactions that have happened that are not reflected in the financial statements in the end result so how do we test for this inquire management about control activities designed to identify unrecorded liabilities and accruals at the end of the accounting period the controls would be part of the closing process uh vouch large dollar items from the purchases journal and cash disbursements journal for a period of time after year end now remember what we have here is after year end because we're doing the audit as of uh the the let's say 1231 the year in let's say 1231 of course we are doing the audit at some point after that point in time so if we're testing something we can actually take a look at some of the transactions that happened after uh the year has closed and use them as part of our testing process examine the data on each receiving report of vendor invoice to see if the liability relates to the current audit period so we're going to take the information and we're going to look at the data that would should be used in order to determine when something should be recorded in this case that being the receiving report why because the receiving reports usually going to be that item before talking about purchases that we actually received the item so we want to see if that's the point in time that the item was actually put on the books was it put on the books in the correct time period it should be put on the books in accordance with the receiving reports we want to see what's the triggering factor as to when the item is going to be put on the books in the accounting system and then basically double check those and we can do that by looking at some of the transactions after the end of the time period and checking to see if it has indeed been recorded at the time period it should have that being the time period the receiving report uh happened we want to examine files of unmatched purchase orders receiving reports and vendor invoices for in any unrecorded liabilities next assertion related to test of details of transactions is existence with existence auditors primary worry is whether the recorded liabilities are valid obligations of the entity so the recorded liability on the books are they valid liabilities of the entity now again you would think that with regards to liabilities they wouldn't overstate the the liabilities but that's basically what we're testing for it with regards to existence because you would think if they were overstating liabilities they wouldn't typically do that intentionally it might be an error possibly to overstate the liabilities but you would think that you wouldn't intentionally overstate the liabilities usually because that would make you look worse the only time that that might happen generally is if there's something for tax reasons or something like that but typically we would think that if there was going to be some type of intentional misstatement they would usually be trying to look better now not worse orders should vouch a sample of items on the listing of accounts payable to the supporting documentation so we're going to take the information from the end result then existence we're talking about here and then we're going to vouch it back to the source documentation and that'll help us to be able to see if the end result was on the books actually it happened so we're going to take the end result and then go back to the past next we have the assertion with relation to the test of details of the cutoff so recall that the cutoff is typically going to be that year-end type of information are things properly recorded in the proper time period order order will try to determine if all purchase transactions are recorded in the correct period for most audits the purchase cutoff line line up with the entity's physical inventory count so we're going to basically line this up when we're going to do it with the physical inventory count and that will typically happen somewhere close to basically the year-end so that we could be so we can check that the physical inventory was on the books as we go out and check the physical inventory is indeed present at that point in time proper cutoff should also be determined for purchase return transactions so we also want to consider the cutoff with regards to purchase returns next we'll take a look at test of details transactions with regards to rights and obligations the assertion of rights and obligations the risk is small related to this assertion because entities generally do not have an incentive to record liabilities do not that are not obligations of the entity so usually when we're considering the rights and obligations with regards to liabilities again the assertion normally the company wouldn't try to look worse most of the time and therefore it's not an assertion that's as high of a priority with regards to liabilities typically next we're going to take a look at the assertion of accuracy valuation and allocation accounts payable should be recorded at either the gross amount of the invoice or net of the cash disbursement amount valuation of accruals depends on the type and nature of the accrued expenses most accruals are fairly easy to value next we'll take a look at the assertion of classification the primary issues with regards to classifications with the test of details of transactions are find and reclassify any material uh debits contained in accounts payable so we're going to go through the accounts payable the detail of accounts payable if there are debit balances in the accounts payable balances then it shouldn't be the case that we would should have a debit balance in accounts payable something kind of funny possibly happened at that point in time and we'd want to remove any debit balances in the accounts payable now there could be an accounts a debit balance if there is some kind of policy so for example if we purchase something and we typically put like a down payment on the purchase of something before we receive it it could be possible that the system then has has been set up that we put that into a negative payable meaning we would kind of have a negative payable to the to the vendor why would we do that because the accounting system makes it a little bit easier to do it could make it a little bit easier to track by vendor what is owed to the vendor instead of putting it into into basically an advanced an advanced payment so instead of putting it into an asset in other words of an advanced payment before we receive the the goods whether it would be inventory or some other type of asset we put it in as a negative liability because it's going to match up once we received the goods that we were going to receive and the system will make it a little bit easier for us to do that with regards to the matching up process of the vendors so if we if that is the case and we would probably want to inquire to the organization to see if that's going to be something they do within their normal policy we may well have debit balances in the in the accounts payable accounts and then we're just going to reclassify them from debit you know negative balances of a liability to asset balances and then we have separate short-term and long-term payables we want to make sure that we're separating out the short-term and the long-term payables make sure that different types of payables are properly classified so we have different types of classifications payables we want to make sure that they are in those proper classifications next we're going to take a look at the assertion of presentation there are two disclosure items of primary importance for accounts payable and accrued expenses with regards to presentation auditor needs to make sure that all related party purchase transactions have been identified so remember whenever we have this related party transactions we could think of a related party such as a subsidiary or something like that then we have a we have issues because we're not we're concerned that there's not an arms length transaction we don't have market forces to help us determine that the transaction is at basically market prices therefore we want to identify those for sure and look into those types of transactions if material the related party purchase transactions should be disclosed so if the related party purchase transactions are material material component we want to disclose those because again that relationship kind of makes those transactions a bit suspect in terms of whether they're market validity of those types of transactions the other primary concern is purchase commitments when the entity has entered into a formal long-term purchase contracts proper disclosure of the terms of the contract should be provided as a footnote so when we have long-term basically contracts we want to make sure that we're clear on what the commitment is in the contract if we have a very complex contract and it's we're dealing with something that's going to be material that's a problem we want to know exactly where we stand in terms of the long-term obligations of a contract now we're going to take a look at accounts payable confirmations now when you think of confirmations you're you're thinking about a third party verification and normally if you hear confirmation the first thing that pops into your mind is probably accounts receivable confirmations that's where we are most likely to do confirmations that and the bank you know we'll send confirmations to the bank we'll send confirmations to accounts receivable most of the time some of the customers to confirm the balances owed to the entity by customers counts payable we can do the same thing but it's usually not as necessary a process so we're almost definitely going to do it for the cash some type of confirmation we're probably going to do it for accounts payable at least to some degree depending on the entity we're doing and then accounts payable we may do it but it's a lesser degree of likelihood that we'll do confirmations meaning we're going to send confirmations out basically to the vendors now that owe the company I mean that the company owes money to the company that we are auditing owes money to the vendors so they're going to be used less often than accounts receivable confirmations partially because auditor is able to examine externally created source documents related to accounts payable so notice in accounts payable we have other type of source documents that are not generated from inside the organization as opposed to accounts accounts payable when we're looking at the things that generated the accounts payable the source documents are generated by the company so that's going to be less reliable type of information if we just look at the invoice that's going to be less reliable information with regards to accounts payable we're looking at bills and things that are going to be given from outside of the organization therefore they are more reliable and possibly then we can rely less on things like confirmation when confirmations are used they are usually positive and are generally blank confirmations in other words notice what we're not doing here we're not saying we're not saying hey here is the balance and you tell us basically yes or no on it or we're not we're not even saying here's the balance and you know don't send it back if you don't agree with it which would be a negative to confirmation we're having a positive confirmation saying hey we would like you to send it back either way and they don't really have the option because we're going to send it blank meaning we're not going to say here's the balance and do you agree with it or not we're going to say you know we feel that this company that we are auditing owes you this much money as of this date or owes you money as of this date would you confirm the balance we're not going to give the balance we're going to give it blank they're going to show us the balance as of that date now notice that even a lot of times when we think about these confirmations from the accounts receivable side of things notice the person that receives it if you're talking about receivable confirmations the person that receives it is owing the company that we're confirming the money and therefore they're they have less incentive to be kind of cooperative there they might see the thing and say and and not want to deal with it or say that I don't owe the company money at this point in time however if you're if you're dealing with a vendor typically that means that the company that we are auditing owes them money so if we ask them do we owe you money they're more they're more likely to know exactly what that is and maybe have incentive to look it up and check it out and send it back to us so they're more they might be more likely and more incentivized to actually to have a higher rate of return of the confirmations in other words to accounts payable people because they're the people that the company that we're auditing owe money to and we're asking them how much money the company that we are auditing owe them and so they might be more likely to take it back now also remember all the rules with the confirmations are pretty much you know the same here we the auditor are doing the confirmation we're not going to do it on the company letterhead we're doing it outside of the company we're going to send them directly to the vendors and then the vendor is going to send them directly back to us the audit firm not to the company so we're keeping the company out of it the vendor is asked to provide the balance owed by the entity so then we have the audit findings identify misstatements with will be aggregated so we're going to take the misstatements we're going to aggregate them we're going to have the projected misstatement is then compared to the tolerable misstatement so the projected misstatement that we get from our findings we compare to the tolerable misstatement the level of misstatement that we accept that would be acceptable that we're going to basically accept if it's and then if the projected misstatement is less than the tolerable misstatement the auditor has evidence that the account is fairly presented so then we're going to say okay if it's less fairly presented however if the projected misstatement is greater than the tolerable misstatement the auditor will conclude that the account is not fairly presented so if it's greater than the tolerable misstatement then of course we'd have to conclude it's not fairly stated