The auditors may decide to confirm accounts payable on an audit engagement. Describe two reasons why the confirmation of accounts payable is not a genreally accepted auditing procedure, describe the audit crcumstances in which the auditors are likely to decide to confirm accounts payble, describe the types of accounts payable the auditors are likely to select for confirmation?
Reasons why confirmation of accounts payable is not generally accepted auditing procedure:
1. Lack of reliability: Accounts payable balances and related transactions are susceptible to manipulation or fraud due to the involvement of multiple parties. Confirmations from third parties may not provide sufficient reliable evidence of the existence and accuracy of these balances.
2. Inefficiency: Confirming each accounts payable balance with the respective vendors can be a time-consuming process. The effort and cost involved in obtaining confirmations from numerous vendors may outweigh the potential benefits gained from this procedure.
Audit circumstances where auditors are likely to decide to confirm accounts payable:
1. High inherent risk: If the auditors identify a high inherent risk related to accounts payable, such as a history of material misstatements or indications of fraud or irregularities, they may choose to perform confirmation procedures to obtain more reliable evidence.
2. Emphasis on completeness: When the audit objective is to ensure that all accounts payable balances are properly recorded, confirming the debts with vendors can provide reasonable assurance that all significant obligations have been captured.
Types of accounts payable the auditors are likely to select for confirmation:
1. Material balances: Auditors will typically select accounts payable balances that are individually significant or are collectively significant in aggregate. Material accounts payable balances have a higher potential impact on the financial statements and, therefore, warrant confirmation.
2. Unusual or suspicious transactions: Accounts payable related to transactions that appear unusual, have high transaction volumes, or involve related parties may be selected for confirmation. This helps to verify the legitimacy of these transactions and assess the risk of fraudulent activity.
To begin, let's break down the questions one by one:
1. Two reasons why the confirmation of accounts payable is not generally accepted as an auditing procedure:
a) Lack of Independence: Auditing standards generally require auditors to be independent from the entity being audited. In the case of accounts payable, the confirmation process involves contacting the entity's suppliers directly. This can create a potential conflict of interest if the auditors are dependent on the client for future work or if they have a close relationship with the suppliers themselves.
b) Reliability of Information: The confirmation process relies on external parties providing accurate and reliable information. However, there can be difficulties in obtaining responses from suppliers due to various reasons such as lack of cooperation, information not being readily available, or suppliers not responding in a timely manner. As a result, the auditors may not be able to obtain sufficient appropriate audit evidence through confirmations alone.
2. Audit circumstances where auditors are likely to decide to confirm accounts payable:
a) High Risk of Misstatement: If the auditors identify a high risk of material misstatement in the accounts payable, they might decide to confirm certain balances. This could be due to suspicions of fraudulent activity, significant fluctuations in account balances, or indications that the client's internal controls over accounts payable may be weak or ineffective.
b) Emphasis on Account Balances: Auditors may choose to confirm accounts payable when there is a significant reliance on these balances in forming their opinion on the financial statements. This could be the case if accounts payable make up a substantial portion of the entity's liabilities or if there have been historical issues relating to accounts payable misstatements.
3. Types of accounts payable auditors are likely to select for confirmation:
a) Large or Significant Balances: Auditors may select accounts payable balances that are substantial in both value and relative importance to the financial statements. This helps in ensuring the accuracy of material amounts within the accounts payable category.
b) High-Risk Suppliers: Auditors may choose to confirm balances with suppliers that have been identified as high-risk. This could include suppliers with whom the entity has had past issues, suppliers associated with management, or suppliers with unusual or suspicious transaction patterns.
It should be noted that the decision to confirm accounts payable relies on the auditors' professional judgment and the specific circumstances of the audit engagement. Confirmation is not mandatory for all audits but may be used selectively based on risk assessment and materiality considerations.