14-39 Taylor, CPA, is engaged in the audit of Rex Wholesaling for the year ended
ID: 2743092 • Letter: 1
Question
14-39
Taylor, CPA, is engaged in the audit of Rex Wholesaling for the year ended December 31. Taylor obtained an understanding of internal control relating to the purchasing , receiving, trade accounts payable, and cash disbursement cycles and has decided not to proceed with tests of controls. Based upon analytical procedures, Taylor believes that the trade accounts payable on the balance sheet as of December 31 may be understated.
Taylor requested and obtained a client-prepared trade accounts payable schedule listing the total amount owed to each vendor.
Required:
What additional substantive audit procedures should Taylor apply in examining the trade accounts payable?
Explanation / Answer
The additional substantive audit procedures in examining the trade accounts payable are provided below:
1) The balance in the general ledger accounts payable controlling account should be matched with the balance in the schedule of accounts payable prepared by Rex Wholesaling.
2) Taylor should obtain written confirmation of balances from some of the vendors of Rex Wholesaling. This process is also known as "Supplier Balance Confirmation". Ideally the balance due in the books of accounts of vendors (in the form of account receivables) should match with the balances due in the books of Rex Wholesaling (in the form of accounts payable).
3) Taylor should obtain information and review disputed cases (if any). Any disputed case, not resolved at year end, may result in understatement of accounts payable and may require creation of a contigent liability.
4) Taylor should perform suitable procedures to detect payables due to related parties.
5) Taylor should perform additional procedures to identify payables not recorded in the books of accounts.
6) Any invoices received by Rex Wholesaling but not paid at year end should be examined.The objective should be to identify invoices which were correctly due to be paid but were not paid by mistake/as a result of an error.
7) Additional procedure should also be performed for verifying the accuracy of year-end cut off.
8) Taylor should investigate payments for invoices made immediately after the year end. The objective should be to ensure that these invoices were recorded as and when they were due to be paid and were taken into account at the time of finalization of books of accounts.
9) The items appearing in the accounts payable schedule prepared by Rex Wholesaling should be checked with the vouchers that were approved for payment and other relevant documents.
10) Taylor should verify that the value of accounts payable has been properly reported, presented and disclosed in the balance sheet at the year end.
11) Taylor should obtain information on unusual items that were received by Rex Wholesaling, but were not accounted for.
12) Taylor should examine any unusual payments that were made by Rex Wholesaling, but there were no corresponding invoices/matching reports.
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