8.43 Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are pre

Question

8.43 Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparing their audit plan for the audit of accounts payable on Marlboro Corporation's annual audit. Saturday afternoon they reviewed the thick file of last year's documentation and they both remembered too well the six days they spent last year on accounts payable. Last year, Clark had suggested that they mail confirmations to 100 of Marlboro's suppliers. The company regularly purchases from about 1,000 suppliers and these account payable balances fluctuate widely, depending on the volume of purchase and the terms Marlboro's purchasing agent is able to negotiate. Clark's sample of 100 was designed to include accounts with large balances. In fact, the 100 accounts confirmed last year covered 80 percent of the total dollars in accounts payable. Both Clark and Kent had spent many hours tracking down minor differences reported in confirmation responses. Nonresponding accounts were investigated by comparing Marlboro's balance with monthly statements received from suppliers.

Required:1. Identify the accounts payable audit objectives that auditors must consider in determining the audit procedures to be performed.

2. Identify situations when auditors should use accounts payable confirmations and discuss whether they are required to use them.

3.Discuss why the use of large dollar balances as the basis for selecting accounts payable for confirmation is not the most effective approach and indicate a more effective sample selection procedure that could be followed when choosing accounts payable for confirmation.

Please cite it using apa, using pcaob

Explanation / Answer

a)Obtain a detailed understanding of the significant processes and practices employed in the implementation of the accounts payable process

b) Understanding the Management Philosophy and operating style and risk assessment practices.

c) Understand organizational structure, delegation of authority and responsibilities relating to the process

d) Accountability for financial and Operational results

e) Process Strengths, weakness and controls

2. ISA 505 – External Confirmations speaks about when an auditor should use external confirmations. It is more reliable when obtained from independent sources outside the entity.

When accounts payable consists of majority amount from a single or few vendors. In this case, it is given that out of 1000 suppliers 100 of them makes to 80% of accounts payable. So it is very relevant to take confirmation from the suppliers.

The confirmations can also be used in the following situations:

a) When the balance is zero or small balance at year-end but was relatively active through out the year.

b) There is a risk of unprocessed or unrecorded vendor invoices and control over payables and cash disbursement is poor.

c) There is a risk of unrecorded liabilities and/or inappropriate accounting because of industry practices.

d) Complex business transactions generate situations where there may be unrecorded accounts combinations, royalty contracts, etc.

3. Selecting the vendors with major balances is more conservative approach. It may not be good all the times. There may be lack of control in small accounts payable also. The money can be easily siphoned out if the audit does not capture these lacunas correctly. So we have to use a proper sampling method to make sure considerable varieties of vendors are selected.

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