For accounts payable, an entity’s accounting and internal control system over purchases, payables and cash disbursements will affect the nature, extent and timing of tests of balances procedures. Larger entities will normally have formally designed and documented entity and activity-level controls that result in all accounts payable being recorded, at the proper amounts and in the proper period. Smaller entities may be expected to have a good accounting system and informal policies, procedures and, at the least, key internal controls. Most of these key controls for smaller entities will be performed at the entity-level by management-level persons.
Entity-level and activity-level controls for smaller entities may consist of the following:
ACCOUNTS PAYABLE—ENTITY-LEVEL KEY CONTROLS
1. Owner or manger approves all vendors and accounts with creditors.
2. Owner or manager approves all vendor payments.
3. Owner or manger receives and reviews unpaid vendor invoices and statements monthly.
ACCOUNTS PAYABLE—ACTIVITY-LEVEL CONTROLS
1. Vendor invoices are entered in the purchases journal when received.
2. Vendor invoices and supporting documents are reviewed by the check signer.
3. Vendor invoices are cancelled when checks are signed.
4. Vendor invoices or receiving reports contain the date goods were received.
5. Unpaid vendor invoices are maintained in a file separate from paid invoices.
The design and operation of these controls will determine control risk for accounts payable. The assessed level of control risk is combined with the auditor’s assessment of inherent risk (usually low for accounts payable) to determine the assessed level of risk of material misstatement. When entity-level key controls are operating, control risk and risk of material misstatement are usually moderate. Moderate levels of risk of material misstatement will result in smaller amounts of tolerable misstatement and smaller lower limits for individually significant items at the financial statement and assertion levels.
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.