Description
Because liabilities and equity are material items on a company’s balance sheet, auditors look at these areas very closely. You will demonstrate your understanding of audit tests over different aspects of liabilities and equity in your response to this Assignment.
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Explanation & Answer
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RUNNING HEAD: ACCOUNTING AUDITING
ACCOUNTING AUDITING
Material Items in Liabilities and Equity
STUDENTS NAME
PROFESSORS NAME
COURSE
DATE
1
Material Items in Liabilities and Equity
2
Unit 1 Assignment Auditing
Question 14-37
The following are typical questions that might appear on an internal control questionnaire
for accounts payable.
1. Are monthly statements from vendor reconciled with accounts payable listing?
Monthly statements from vendors are reconciled with accounts payable listing to
eliminate the risk of understatement or overstatement of the accounts payable.
2. Are vendor’s invoices matched with receiving report before they are approved for
payment?
Vendors’ invoices are matched with receiving report before they are approved for
payment to help in eliminating the risk of making payment of goods that were not
delivered or received.
• Described the purpose of each of the above internal control activities.
The process of reconciliation of the monthly statements from vendors with accounts
payable listing helps the vendors to give an actual estimate of the accounts payable which
reduces the risk of understatement or overstatement of the accounts payable. On the other
hand the matching of the vendors invoices with the receiving report helps in making
payment for goods that were received only and eliminate the risk of making payment of
goods which could not be received in an organization.
• Described the manner which each of the above procedures might be tested.
The process of reconciliation for the monthly statement for the accounts payable listing
can be tested by reviewing accounts payable for the previous financial year which is
subjected to the general ledger. On the other hand the process of matching vendors’
invoices with the receiving report can be tested by the process of bookkeeping which
gives the accounting department the records for the goods that might have been received
to make their payment.
• Assuming that the operating effectiveness of each of the above procedures is found
to be inadequate, described how the auditors might alter their substantive
procedures to compensate for the increased level of their risks of material
misstatement.
To alter the substantive procedure in reconciliation of the monthly statements an auditor
is responsible for identifying a list of steps in the compensation for vendor’s
reconciliation. These include the process of checking for missing payments, duplicating
bills check for missing credits and checking the amount of discrepancies which help in
reducing the risk of material misstatement. On the other hand the auditing process for the
vendors invoices matching, an auditor should identify the accounts payable in the balance
sheet and the general ledger to obtain information on the disputed balances. This will
help in auditor’s compensation for the increased level of the risks of material
misstatement in the vendors invoice matching wit...