Accounts Payable Audit: Search for Unrecorded Liabilities
How to audit accounts payable: why completeness is the main risk, the key procedures, and how to run the search for unrecorded liabilities step by step.
Read more →Substantive testing is the part of the audit that looks for misstatements in the numbers themselves. Controls testing asks whether the client's process works. Substantive testing asks whether the balance is right.
| Substantive analytical procedures | Tests of details | |
|---|---|---|
| What you do | Build an expectation of a balance and compare it with what was recorded | Examine individual transactions or balances against evidence |
| Works best for | Large volumes of predictable transactions: payroll, rent, interest, depreciation | Balances with specific risks, unusual items, anything that needs a document |
| Evidence comes from | The relationship between data | Documents, confirmations, counts, recalculation |
| Examples | Payroll expense vs headcount × average pay; interest expense vs average debt × rate | Vouching revenue to invoices, AR confirmations, inventory count observation |
A substantive analytical procedure is only evidence if the expectation is precise enough to catch a material misstatement. "Revenue is up 8% and the client says business was good" has no independent expectation behind it, so it gives you very little evidence.
Under AU-C 330 (and ISA 330 and CAS 330, which say the same thing):
Under AU-C 240, you must also test journal entries and other adjustments for evidence of management override, whatever the risk assessment says. This is required on every audit. See our page on journal entry testing.
The assertion decides the test, and above all the direction of the test.
| Assertion | The question | Typical tests |
|---|---|---|
| Existence / occurrence | Did it happen, does it exist? | Vouch recorded items to support; confirmations; inventory observation |
| Completeness | Is everything recorded? | Trace source documents to the records; search for unrecorded liabilities; cut-off tests |
| Accuracy / valuation | Are the amounts right? | Recalculation; pricing tests; allowance and impairment review |
| Cut-off | Is it in the right period? | Test transactions either side of year end |
| Rights and obligations | Does the entity own it or owe it? | Contracts, title documents, loan agreements |
| Classification and presentation | Is it in the right account and disclosed properly? | Review of coding; disclosure checklists |
Our guide to vouching vs tracing goes deeper into why direction matters.
Cash. Confirm balances with the bank, test the year-end bank reconciliation (agree reconciling items to the next period's statements), and review for unusual transfers near year end.
Accounts receivable. Send confirmations for a sample of balances. For non-replies, test subsequent receipts, and vouch the remaining items to invoices and shipping documents. Test the allowance against aging and history.
Revenue. Vouch a sample of recorded revenue to contracts, invoices and proof of delivery. Test cut-off around year end. Use analytics by month, product or location where the data is reliable.
Inventory. Observe the count, test counts both ways (floor to sheet and sheet to floor), test pricing to invoices or cost records, and look for slow-moving items.
Accounts payable and expenses. Vouch expense samples to invoices and approvals for occurrence. Run the search for unrecorded liabilities for completeness. Analytics work well for recurring costs.
Payroll. Substantive analytics are usually strong here, with tests of details for new hires, terminations and unusual payments.
For tests of details you usually combine:
Monetary unit sampling suits overstatement testing because larger items are more likely to be selected. For completeness, the sample has to come from a population outside the records.
When you find a misstatement in a sample, project it to the population. Do not just correct the item you found.
You can perform substantive procedures at an interim date, but then you need procedures covering the period from interim to year end: usually a roll-forward of the balance plus analytics or more testing. Cut-off and year-end balances are almost always tested at or after year end.
Each test needs a clear objective, the population and how the sample was chosen, what was done to each item, the result, and a conclusion that ties back to the assertion. Our guide to audit working papers covers what reviewers and inspectors look for.
The most time-consuming substantive tests are the document-heavy tests of details: vouching samples to invoices, receipts and contracts, and journal entry testing. Warp runs those and returns workpapers where every conclusion links to the source page with the reasoning shown, so your team reviews and signs off. See test of details and journal entry testing in Warp.
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How to audit accounts payable: why completeness is the main risk, the key procedures, and how to run the search for unrecorded liabilities step by step.
Read more →The three stages of analytical procedures in an audit, what AU-C 520 and ISA 520 require, and how to build an expectation precise enough to count as evidence.
Read more →The financial statement assertions under AU-C 315, ISA 315 and PCAOB AS 1105, what each one means, and the audit procedures that test it.
Read more →