Most large companies prepare financial statements in accordance with generally accepted accounting principles (GAAP). To ensure compliance, these companies must hire an independent auditor to verify all financial accounts. One important account that auditors pay attention to is the balance of accounts payable. Moreover, when confirming the accounts payable balances, auditors have their own guidelines as to which documentary proof more emphasis should be put on.
Accounts Payable Sampling
The first thing you should be aware of before conducting an audit of a company’s accounts payable is that auditors utilize sampling rather than confirming every dollar that comprises the account balance. Sampling entails choosing specific invoices and payables that are representative of the company’s purchasing and borrowing activity. However, auditors should always ensure there is emphasis on the larger transactions a company engages in. For example, if three purchase invoices account for 80 percent of a company’s payable account, auditors must focus on auditing each invoice.
Confirming Purchase Invoices
For most companies, the accounts payable balance will include an array of invoices for the purchase of assets, supplies, equipment and services. Once the auditor evaluates the sample population of invoices to investigate, each one requires confirmation. Confirming invoices requires review of the actual invoice, confirming that the invoice amount is the same as the amount the company records on its books and verifying that the company actually receives what it pays for. For example, if an invoice covers the purchase of inventory, standard audit practice requires the auditor to physically check some of the inventory on hand.
Depending on the capital structure of a company, the payables account can also include a significant amount of loan and interest payments. The first step in confirming the balance is to request the actually promissory note or loan agreement for each debt. Obtaining the promissory note will verify the principal balance of the loan and the interest rate. With this information, an auditor can review the entries the company records to ensure that the proper amount of interest and principal is accrued. In addition, if the company receives periodic statements from the bank, retrieving each statement can provide further assurance of the account balance.
With the recent advent of fraudulent activity within large corporations, more emphasis has been placed on detecting fraud. When auditors review any activity within the accounts payable account, the detection of fraud must always be part of the evaluation. An auditor has many ways to detect fraud in the accounts payable account, such as verifying that the invoicing company actually exists and is not fictitious, monitoring any abnormal transactions, such as a sudden spike in a specific employee’s salary and verifying some of the bank accounts where payments are sent.