Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparin

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:

1. Identify the accounts payable audit objectives that auditors must consider in determining the audit procedures to be performed.

2.Identify situations when auditors should use accounts payable confirmations and discuss whether they are required to use them.

3.Discuss why the use of large dollar balances as the basis for selecting accounts payable for confirmation is not the most effective approach and indicate a more effective sample selection procedure that could be followed when choosing accounts payable for confirmation.

please cite it

Explanation / Answer

1)

Audit Objectives for Audit of Accounts Payable are basically to Determine the True Value of Current Liabilities that all the Transactions are Completely Recorded, whether all the Account payables recorded are actually exists on Balance Sheet Date, whether the Liabilities recorded actually creates obligation on Entity to pay the Amount in future, whether all Entries are properly Disclosed and Recorded, Whether Amounts Recorded are properly valued etc.

2)

Account Payable Confirmation is Required whenever according to the Auditor there are chances of Frauds, Fictitious Transactions, Dummy Entries, Actual Existence of Account Payables, Doubts in Valuation of Transactions recorded by entity etc.

3)

All the times choosing only large Account Balance Account Payables for Confirmation is not effective sample because there are chances that entity recorded dummy entries in small balance account payables or may leave some account payables unrecorded in books so that liabilities can be understated So Auditor Should chose Sample on Random Basis Sample should be different every year so that Entity Should not be aware of the sample of Auditor and Sample should be selected according to the Assessment of Risk by the Auditor.

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