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

Question

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

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

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

C. 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.

Explanation / Answer

A. Accounts payable Audit objective is to determine the exixtence and occurence of transactions, completeness, valuation, presentation and disclosure of the transactions.The Audit must cover the whole cycle from order placing to material receipt, invoice booking and payment and the existence of proper controls at each stage.

B. Actually the use of Accounts payable confirmation is not preferred in Audit. The system requires extensive reconciliation and in transit adjustments that may be cumbersome. Instead the vendor monthly statements may be useful for reconciling balances with check of the total Accoounts Payable cycle controls and the utlization of the controls in proper way.

C. The use of Large Accounts payable $ balances for vendor confirmation may not be the effective method. In fact in the absence of proper control the understatemnet or overstatement of accounts will happen in accounts where no balance will be left after the misappropriation. Again cross check of PO price , invoice price, checking of controls in material receipts and three way matching of invoice , controls in payment process are more important aspects to be confirmed in Accounts Payable Audit.

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