This chapter explained the fundamental controls over accounts payable and purchase transactions. It also discussed the auditors' consideration of these controls and the substantive procedures for accounts payable and purchases. To summarize:

• Accounts payable are short-term obligations arising from the purchase of goods and services in the ordinary course of the business.

• The purchases cycle includes initiating and authorizing purchases, ordering goods and services, and recording and paying accounts payable. Effective internal control over purchase transactions is best achieved by having separate departments responsible for purchasing, receiving, and accounting for the transactions. In this manner, payments are made only for those purchases that are properly authorized and received.

• The auditors' principal objectives for the substantive tests of accounts payable and purchases are to: (a) substantiate the existence of recorded accounts payable and the occurrence of purchase transactions, (b) establish the completeness of accounts payable and purchase transactions, (c) determine that the client has obligations to pay the recorded accounts payable, (d) determine the appropriate valuation of accounts payable, and (e) determine that the presentation and disclosure of accounts payable and purchases are appropriate.

• In auditing accounts payable and other liabilities, it is important for the auditors to remember that an understatement of liabilities will exaggerate the financial strength of a company in the same way as an overstatement of assets. Therefore, the auditors' substantive procedures primarily focus on the objective of determining the completeness of recorded amounts. A number of these procedures involve inspecting documents related to transactions occurring during the subsequent period to determine whether these items should have been recorded as liabilities at year-end.

• Accrued liabilities represent obligations payable for services received before the balance sheet date that will be paid in the subsequent period. Examples include accrued warranty liabilities, accrued payroll, and accrued pension liabilities. The substantive procedures to audit these liabilities generally include inspection of documents, recomputation, and analytical procedures.

Describe the nature of accounts payable and other liabilities.

Describe the auditors' objectives for the audit of accounts payable.

Identify and explain the fundamental controls over payables.

Assess the risks of material misstatement (inherent and control risks) of accounts payable and other liabilities.

Design typical tests of controls used by auditors to support the assessed level of control risk for the financial statement assertions related to accounts payable.

Explain how the auditors design substantive audit procedures to address the risks of material misstatement of accounts payable.