Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparin
ID: 2478059 • Letter: A
Question
Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparing their audit plan for the audit of accounts payable on Marlboro Corporation's annual audit. Saturday afternoon they reviewed the thick file of last year's documentation and they both remembered too well the six days they spent last year on accounts payable.
Last year, Clark had suggested that they mail confirmations to 100 of Marlboro's suppliers. The company regularly purchases from about 1,000 suppliers and these account payable balances fluctuate widely, depending on the volume of purchase and the terms Marlboro's purchasing agent is able to negotiate. Clark's sample of 100 was designed to include accounts with large balances. In fact, the 100 accounts confirmed last year covered 80 percent of the total dollars in accounts payable. Both Clark and Kent had spent many hours tracking down minor differences reported in confirmation responses. Nonresponding accounts were investigated by comparing Marlboro's balance with monthly statements received from suppliers.
Required:
A. Should your procedures for unrecorded liabilities be affected by the fact that the client made a journal entry to record 2014 bills that were received later? Explain.
B. Should your test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official certifies that, to the best of that person's knowledge, all liabilities have been recorded? Explain.
C. Should your test for unrecorded liabilities be eliminated or reduced because of the internal audit work? Explain.
D. What sources, in addition to the 2015 voucher register, should you consider for locating possible unrecorded liabilities?
Explanation / Answer
Answer:A The fact that the auditee made a journal entry to record suppliers' invoices which were received late should simplify the CPA's audit for unrecorded liabilities and reduce the possibility of a need for a further adjustment, but the CPA's audit is nevertheless required. If the auditee has not journalized late invoices, the CPA is compelled in his testing to substantiate what will ultimately be recorded as an adjusting entry. In this examination the CPA should audit entries in the accounts payable records (e.g., trial balance) for the year being audited to ascertain that all items which according to dates of receiving reports or suppliers' invoices were applicable to that year have been included in the journal entry recorded by the auditee.
Answer:B No. The CPA should obtain a letter in which responsible executives of the auditee's organization represent that to the best of their knowledge all liabilities have been recognized. However, this is done as a normal audit procedure to afford additional assurance to the CPA and it does not relieve the responsibility for doing other substantive audit work.
Answer:C Whenever a CPA is justified in relying on work done by an internal auditor, he or she should curtail (but not eliminate) his or her own audit work. In this case, the CPA should have ascertained early in the examination that Marlboro's internal auditor is qualified by being both technically competent and reasonably independent. Once satisfied as to these points, the CPA should discuss the nature and scope of the internal audit program with the internal auditor and review the working papers in order that the CPA may properly coordinate the audit program with that of the internal auditor. If the Marlboro's internal auditor is qualified and has made tests for unrecorded liabilities, the CPA may limit further audit work in this audit area.
Answer:d In addition to the next-year accounts payable records, the CPA should consider the following sources for possible unrecorded liabilities:
1. Unentered suppliers' invoice file
2. Status of tax returns for prior years still open.
3. Discussions with employees.
4. Representations from management.
5. Comparison of account balances with preceding year.
6. Examination of individual accounts during the audit.
7. Existing contracts and agreements.
8. Minutes.
9. Attorney's bills and letter of representation.
10. Status of renegotiable business.
11. Correspondence with principal suppliers.
12. Audit testing of cutoff date for reciprocal accounts, e.g., inventory and fixed assets.
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