Efficient Tests of Balances Series—No. 26: More Effects of Risk on Accounts Payable Procedures
To illustrate the audit program modification process based on the assessed level of risk of material misstatement, following are possible basic procedures for accounts payable at three levels of risk of material misstatement, 1) high, 2) slightly less than high and 3) low to moderate.
oPerform an extensive search for unrecorded liabilities including examining supporting documents of subsequently recorded transactions for at least one payment cycle (weekly, bi-weekly or monthly payment period) and open invoices, receiving reports and purchase order files. The lower limit for individually significant items at the assertion (classification) level should be used to select disbursements and documents for inspection. Consider confirming invoices for the year received from major suppliers and accounts with zero balances.
•Slightly less than high RMM
oPerform generally the same procedures as above due to the high risk of unrecorded payables. The period selected for the search of subsequent disbursement could be shortened and the lower limit for individually significant items could be raised slightly.
•Moderate to low RMM
oShorten the length of the out-of-period search for unrecorded liabilities significantly, possibly to a few days after the yearend. Compare a handful (5 to 10) of vendor’s statements to recorded accounts payable balances.
10 Steps to Calculating the Lower Limit of Individually Significant Items for Accounts Payable Reflecting Risk:
Here is an example of a calculation of the lower limit for individually significant items for accounts payable. In accordance with professional standards, all percentages are selected judgmentally.
1.The higher of total revenues or total assets is sales $ 4,800,000
2.A common materiality percentage (a sliding table
and precise percentages are not required by GAAS) x 1%
3.Planning materiality at the financial statement level 48,000
4. TM percentage selected assuming risk is less than high x 60%
5.Tolerable misstatement at the financial statement level 28,800
6.LL of ISIs percent selected assuming risk is less than high x 20%
7.Lower limit of individually significant items--financials 5,760 (A)
8.TM at classification level assuming risk is slightly
less than high
TM at financial statement level $ 28,800
Percentage selected assuming risk is less than high x 50%
Tolerable misstatement for accounts payable $ 14,400
9.LL of ISIs percent selected assuming risk is less
than high x 20%
10. Lower limit for individually significant items for
accounts payable 2,880 (B)
(A) The lower limit for individually significant items at the financial statement level is used for generally determining which accounts on the trial balance to consider for auditing procedures, unusual transactions from reading general ledger account activity and when proposed adjusting journal entries may be necessary.
(B) The lower limit for individually significant items at the classification level for accounts payable may be used to guide the selection of subsequent disbursements for the out-of-period liabilities search.
Efficient substantive procedures for accounts payable and other account classifications resulting from cost-beneficial audit strategies are discussed in my live and on-demand webcasts which can be accessed by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com.
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.