Accounts Payable Audit: Search for Unrecorded Liabilities

Accounts payable is audited differently from most balances. For assets, the usual worry is that the balance is too high. For payables, the worry is that it is too low: invoices that should have been recorded at year end but were not. That makes completeness the main assertion, and the search for unrecorded liabilities the main test.

Assertions and risks

Assertion	The risk in AP
Completeness	Liabilities left out, so expenses are understated and profit overstated. The main risk.
Cut-off	Goods received before year end, invoice booked in the next year.
Existence	Fictitious vendors or invoices (fraud risk, usually tested through disbursements).
Accuracy and valuation	Wrong amounts, foreign currency errors, duplicate invoices.
Classification	Debit balances netted against payables; capital items expensed or the reverse.

Our guide to audit assertions covers the full list.

Key procedures

1. Agree the AP listing to the GL. The aging at year end should total to the AP control account. Investigate reconciling items.
2. Review the aging. Look for old items, debit balances, related-party vendors and unusual names.
3. Reconcile vendor statements for major suppliers. A statement comes from outside the company, so it can reveal invoices the client never recorded.
4. Search for unrecorded liabilities (below).
5. Test cut-off. Take receiving reports from the last days of the year and the first days of the next, and check each one landed in the right period.
6. Review accruals. Recurring costs (utilities, rent, professional fees) should be accrued if not invoiced by year end.
7. Analytics. Compare AP and expenses with prior years and budgets, and days payable outstanding with prior periods.
8. Confirmations, where the risk calls for them. Confirming vendors with small or zero balances is more useful for completeness than confirming the large balances.

The search for unrecorded liabilities, step by step

The search looks at what happened after year end to find liabilities that existed at year end. It is a tracing test: you start outside the AP listing. See vouching vs tracing.

1. Get the populations. Payments made after year end, typically up to the date fieldwork ends (often 30 to 90 days), and unpaid invoices received after year end.
2. Set a threshold based on materiality. Test every item above it. Many firms add a sample below it.
3. For each item, find the invoice and the receiving document, and decide when the goods or services were received.
4. If received before year end, the liability should be in the year-end AP or accruals. Trace it there.
5. If it is missing, it is an unrecorded liability. Record it as a misstatement and consider whether there are more like it.
6. Document each item: the payment or invoice, the service or receipt date, where it was recorded, and the conclusion.

The most common error is judging by invoice date instead of service date. An invoice dated January 8 for December consulting is a December liability.

Other things to look for

• Duplicate invoices, the same amount and vendor with a slightly different invoice number.
• Payments to vendors not on the master file.
• Round-number or unsupported payments near year end.
• Debit balances that should be reclassified as receivables.

Where Warp fits

The search for unrecorded liabilities and expense vouching are document-heavy: every item needs the invoice, a receipt date and a decision. Warp works through those samples, matching each item to its invoice, and links each conclusion to the source page so your reviewer can check it. See test of details, and our guides to three-way match and substantive testing.