The existence assertion for accounts payable includes:
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Management assertions are claims made by members of management regarding certain aspects of a business. The concept is primarily used in regard to the audit of a company's financial statements, where the auditors rely upon a variety of assertions regarding the business. The auditors test the validity of these assertions by conducting a number of audit tests. Management assertions fall into the following three classifications. Show
Transaction-Level AssertionsThe following five items are classified as assertions related to transactions, mostly in regard to the income statement:
Account Balance AssertionsThe following four items are classified as assertions related to the ending balances in accounts, and so relate primarily to the balance sheet:
Presentation and Disclosure AssertionsThe following five items are classified as assertions related to the presentation of information within the financial statements, as well as the accompanying disclosures:
There is a fair amount of duplication in the types of assertions across the three categories; however, each assertion type is intended for a different aspect of the financial statements, with the first set related to the income statement, the second set to the balance sheet, and the third set to the accompanying disclosures. If the auditor is unable to obtain a letter containing management assertions from the senior management of a client, the auditor is unlikely to proceed with audit activities. One reason for not proceeding with an audit is that the inability to obtain a management assertions letter could be an indicator that management has engaged in fraud in producing the financial statements. The primary test to confirm the completeness assertion for accounts payable and other liabilities is to perform a “search for unrecorded liabilities”. Basically, the audit team obtains a listing of all cash disbursements made for a period of time after year-end. The audit team then requests the invoice for the cash disbursement and determines if the invoice was properly included or properly excluded from the accounts payable balance at year-end. Previous Question Next Question Back To All Questions The primary concern for expenses is that the company has not recorded all expenses in the financial statements. By not recording certain expenses, the company can inflate profit. The audit team can trace invoices or cash disbursements to the general ledger (i.e. the search for unrecorded liabilities). In this article, we will cover the audit procedures for Accounts Payable. In most circumstances, we commonly call Accounts Payable as Trade Payable. It is really important to perform proper audit procedures for Accounts payable as this is a critical portion of financial records and considered to be one of the high-risk items in the financial statements. In the accounts payable audit there is a high-risk of misstatement due to fraud or error, so strong accounts payable audit procedures are required to ensure the accuracy. The main objectives of accounts payable audit are as follow: In this section, we cover the risks for the accounts payable as well as the control deficiencies (sometimes called internal control deficiencies) that may happen for the accounting and management of accounts payable. Below are the key risks associated with the accounts payable that we commonly encounter so far:
In addition, there are also control deficiencies that auditor should assess and detect. The control deficiencies give rise to the possible fraud as well as other problems that result in the misstatement of accounts payable recorded and presented in the Balance Sheet. Below are the examples of control deficiencies that we commonly encounter during the course of the audit:
READ: What is Walkthrough Test? The above problems both on risk and control deficiencies are they key areas that shall need to take into account and perform the relevant audit procedures for the audit of the accounts payable. In the later section of this article, we will cover the key assertions as well as the audit procedures for the audit of accounts payable. Key Assertions of Accounts Payable AuditAs mentioned above, the audit on accounts payable is very important as it is the key and material items in the financial statements. In order to audit the accounts payable, it requires to use the combination of analytical procedures and tests of detail or substantive audit procedures for accounts payable. Typically, we perform the audit of accounts payable in conjunction with the audit of purchases. Thus, in this section, we will take some assertions that we usually test in combination with accounts payable. Below are the key audit assertions for accounts payable and we will group these assertions into 3 main types: Financial Statements AssertionsAudit Objectives in Relation to the AssertionsAssertion about classes of transactionsOccurrence: This is to ensure that all purchase transactions are actually incurred and related to the entity.Completeness: This is to ensure that the accounts payable balance reported on the balance sheet includes all payable transactions occurring during the period. Accuracy: This is to ensure that all purchase transactions have been appropriately recorded at the correct amount. Cut-Off: This is to ensure that all transactions have been recorded in the correct accounting period. Classification: Auditors need to check if payable balances are properly classified in subclasses and debits and credits are accurately applied.Assertions about the account balance as at the year-endExistence: The existence assertion means that the accounts payable balance recognized in the financial statements actually exists at the reporting date. Rights and Obligations: The rights and obligations assertion means that the company actually owes a liability for accounts payable at the reporting date. Completeness: This is to ensure that the accounts payable reported on the Balance Sheet includes all accounts payable transactions occurring during the period. Valuation and Allocation: The valuation assertion is ensuring the amount is correctly recorded. Assertions about presentation and disclosureThe combination of Occurrence, Rights and Obligations: For all these assertions, we want to ensure that the entity being audited has properly disclosed all events and transactions relating to the accounts payable and those have actually incurred and pertain to the entity. Completeness: This is to ensure that the entity has included all required disclosures. Classification and Understandability: This is to ensure that all accounts payable are properly presented and all required disclosures have been clearly expressed. Accuracy and Valuation: This is to ensure that all financial and other information have been disclosed fairly at the appropriate amounts. Key Audit Procedures for Accounts Payable AuditIn order to easily understand about each types of audit procedure, we will group all those audit procedures into 9 categories as below: READ: Self-Interest Threat to Independence and Objectivity of Auditors Please note that in one audit procedure is able to ensure one or more audit assertions. Thus, you might see the same audit procedure for each group of assertions in this section. CompletenessUnder this section, the auditor perform the audit procedures to ensure and confirm accuracy and valuation which is part of the presentation and disclosure assertion of the accounts payable. Below are the audit procedures that audit may carries out to ensure this assertion. What are the assertions for accounts payable?The primary relevant accounts payable and expense assertions are:. Existence.. Completeness.. Cutoff.. Occurrence.. What is existence assertion?Existence. The assertion of existence is the assertion that the assets, liabilities, and shareholder equity balances appearing on a company's financial statements exist as stated at the end of the accounting period that the financial statement covers.
How to test for completeness assertion in accounts payable?The primary method for testing the completeness of accounts payable is to search for unrecorded liabilities. This is done by obtaining a list of all cash disbursements made after year-end.
Which of the following is the most important audit assertion for accounts payable?Ordinarily, the most significant assertion relating to accounts payable is: Completeness.
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