Answer The Following Questions: The Authors Discuss Account

Answer The Following Questions11 The Authors Discuss Accounts Payable

Answer the following questions:

1. The authors discuss accounts payable confirmation and how they are different from accounts receivable confirmation, discussed previously. Do you think accounts payable can be useful to the auditor? How? What are the limitations of accounts payable confirmation? What are some alternatives to accounts payable confirmation?

2. Which of these cycles would you, as an auditor, spend more time with? Would you suspect more misstatements in the revenues and collection cycle or in the purchases and payments cycle? Why? Give some examples to support your opinion.

3. What assertions is the auditor interested in when auditing Property, Plant, and Equipment? What are some possibilities for fraud in this particular account? What are some judgment decisions that the auditor needs to make in this account?

Paper For Above instruction

Auditing accounts payable is a critical aspect of financial statement audits, providing valuable insights into a company's liabilities and operational integrity. Accounts payable confirmation serves as a vital audit procedure, offering corroborative evidence about the existence and accuracy of obligations owed by the company to its suppliers. Unlike accounts receivable confirmations, which gather evidence from third parties about amounts owed to the company, accounts payable confirmations are more challenging due to dispersed creditor relationships and the potential for management interference. Nevertheless, they can be instrumental in detecting misstatements, errors, or potential fraud related to liabilities.

Auditors find accounts payable confirmation useful primarily because it provides direct evidence regarding the completeness, existence, and accuracy of liabilities recorded in the financial statements. Confirmations can reveal discrepancies such as duplicate payments, inflated liabilities, or unrecorded obligations. These insights are essential because liabilities directly impact the accuracy of financial reporting and can influence the company’s liquidity ratios and debt covenants. Despite their usefulness, limitations of accounts payable confirmation include low response rates from vendors, the possibility of management influencing responses, and the challenge of verifying large volumes of small, routine payables. Additionally, the confirmations may not be timely, especially if vendors have not responded before the audit report date.

Alternatives to accounts payable confirmation include the analytical review of payable balances, subsequent disbursements testing, and review of purchase orders and invoice matching processes. For example, analyzing payments made after the balance sheet date can provide indirect evidence of liabilities existing at year-end. Similarly, testing the endorsement and approval processes for purchases can help verify the completeness and accuracy of payable balances. Internal control assessments also serve as crucial tools to evaluate whether the company’s procedures effectively prevent and detect errors or fraud in accounts payable.

When considering the audit of various cycles, auditors often allocate different levels of attention based on perceived risks. The revenue and collection cycle generally involves more susceptibility to misstatements, including revenue recognition fraud or overstatement. This cycle is often targeted because it directly affects profitability and can be manipulated through aggressive recognition policies—such as recording fictitious sales or premature revenue recognition. Conversely, the purchases and payments cycle may involve misappropriation of assets through fictitious vendors or altered payment instructions, but historically, revenues tend to be a more prominent area of concern. Therefore, as an auditor, more time may be spent scrutinizing the revenue cycle to detect deliberate misstatements or fraudulent activities, supported by examples such as fictitious sales, channel stuffing, or manipulating timing of revenue recognition.

In auditing Property, Plant, and Equipment (PP&E), auditors focus on assertions such as existence, rights and obligations, valuation and allocation, and completeness. They verify physical existence through inspections and confirmations. They assess rights by reviewing ownership documents and lease agreements. Valuation is scrutinized to ensure that depreciation is correctly calculated and that impairments are recognized when necessary. The completeness assertion considers whether all relevant assets are recorded, especially during significant acquisitions or disposals.

Fraud in PP&E accounts can include overstating asset values through capitalizing expenses or inflating asset costs, as well as fictitious additions or disposals. Misappropriation can occur by diverting assets through unauthorized sales or theft. Judgments involve estimating the useful life and residual value of assets, determining impairment indicators, and deciding on appropriate depreciation methods. These estimations require professional judgment, and auditors need to evaluate whether the assumptions and estimates made by management are reasonable and consistent with accounting standards.

Overall, effective audit procedures surrounding accounts payable, revenue cycles, and PP&E require a combination of substantive testing, internal control evaluation, analytical procedures, and professional skepticism. These elements work together to ensure the accuracy, completeness, and validity of financial statement assertions, ultimately safeguarding stakeholders’ interests and maintaining financial reporting integrity.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services: An Integrated Approach. Pearson.
• Crane, D. A., & Mathews, R. (2018). Auditing: A Risk-Based Approach. McGraw-Hill Education.
• Hoyle, W., Schaefer, R., & Doupnik, T. (2019). Intermediate Accounting. McGraw-Hill Education.
• Humphrey, C., Moizer, P., & Turley, S. (2010). The audit process. Routledge.
• Kinney, W. R., & Raab, R. L. (2017). Financial Accounting and Reporting. Cengage Learning.
• Messier, W. F., Glover, S. M., & Prawitt, D. F. (2019). Auditing & Assurance Services. McGraw-Hill Education.
• Simunic, D. A. (2018). Cost of auditing: A review of the literature. Auditing: A Journal of Practice & Theory.
• Whittington, O. R., & Pany, K. (2019). Principles of Auditing & Assurance. McGraw-Hill Education.
• International Auditing and Assurance Standards Board (IAASB). (2022). International Standards on Auditing.
• Public Company Accounting Oversight Board (PCAOB). (2023). Auditing standards and related rules.