Accounting Instruction, Help, & How To (Financial & Managerial)

Introduction

In this presentation, we’ll delve into the auditing process for accounts payable, with a specific focus on accrued expenses. The aim is to understand how to validate these elements through various assertions and substantive analytical procedures.

Assertions in Auditing Accounts Payable and Accrued Expenses

1. Existence
   • Assertion: Accounts payable and accrued expenses are valid liabilities.
   • Objective: Ensure that the liabilities reported in the financial statements are real obligations of the entity.
2. Completeness
   • Assertion: All accounts payable and accrued expenses have been recorded.
   • Objective: Verify that all liabilities are included in the financial statements and that related disclosures are accurate and complete.
3. Accuracy, Valuation, and Allocation
   • Assertion: Accounts payable and accrued expenses are reported at correct amounts.
   • Objective: Confirm that the amounts are accurate and any necessary valuation or allocation adjustments are made, with related disclosures properly measured and described.
4. Classification
   • Assertion: All accounts payable and accrued expenses are recorded in the correct accounts.
   • Objective: Ensure proper categorization in the financial statements.
5. Presentation
   • Assertion: Accounts payable and accrued expenses are correctly aggregated or disaggregated.
   • Objective: Verify that disclosures are relevant, understandable, and appropriately presented.

Substantive Analytical Procedures

Substantive analytical procedures involve examining the relationships between financial and non-financial data. Here’s how they can be applied to accounts payable and accrued expenses:

1. Comparison of Payables Turnover
   • Procedure: Compare the payables turnover ratio and days outstanding in accounts payable to previous years and industry data.
   • Objective: Detect potential overstatements or understatements of liabilities and expenses.
2. Year-over-Year Balance Comparison
   • Procedure: Compare current year balances in accounts payable and accruals with those from prior years.
   • Objective: Identify any unusual changes or discrepancies that might indicate misstatements.
3. Vendor Balance Comparison
   • Procedure: Compare amounts owed to individual vendors in the current year’s accounts payable listing with amounts from prior years.
   • Objective: Detect potential overstatements or understatements of liabilities and expenses.
4. Purchase Returns and Allowances Analysis
   • Procedure: Compare purchase returns and allowances as a percentage of revenue or cost of sales to prior years and industry data.
   • Objective: Identify possible misstatements in purchase returns.
5. Accrued Interest Expense Prediction
   • Procedure: Predict accrued interest expense based on loan terms and outstanding balances.
   • Objective: Detect any understatement of accrued interest.

Conclusion

Understanding and applying these assertions and substantive analytical procedures is crucial for effectively auditing accounts payable and accrued expenses. By focusing on these areas, auditors can ensure the accuracy and completeness of the financial statements, ultimately enhancing their reliability and transparency.