Auditing Accounts Payable
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Accounts payable is a significant liability on most balance sheets, which makes it a frequent focus in an audit — and a well-tested topic on the AUD section of the CPA exam. Three procedures do most of the work: search for unrecorded liabilities, vendor reconciliation, and cut-off review.
What is the search for unrecorded liabilities?
This procedure looks for obligations the company has already incurred but hasn't yet recorded — targeting the completeness assertion. Missing an unrecorded liability understates both liabilities and expenses, making the company look better off than it actually is.
Example: You're auditing a manufacturing company and review invoices received in the first two weeks of the new period. You find an invoice for raw materials dated December 30 that wasn't recorded until January — a red flag that the liability belongs in the prior period.
What is vendor reconciliation?
Vendor reconciliation compares the company's accounts payable ledger to vendors' statements or invoices to confirm they agree — targeting the accuracy and existence assertions. Discrepancies can come from timing differences, errors, or fraud.
Example: You're auditing a retail store where the AP ledger shows $25,000 owed to a vendor, but the vendor's own statement shows only $20,000 due. Investigating, you find the company recorded the same invoice twice — exactly the kind of error reconciliation is designed to catch.
What is a cut-off review?
A cut-off review confirms that transactions around year-end are recorded in the correct accounting period — targeting the cut-off assertion. Getting this wrong distorts key ratios and performance indicators for anyone relying on the financial statements.
Example: An invoice for office supplies dated December 29 wasn't recorded in accounts payable until January 5 of the next year. The expense and liability belong in the year the cost was incurred, not the year it happened to be recorded.
Each procedure catches a different failure mode. The search for unrecorded liabilities asks "did we miss something?" Vendor reconciliation asks "does our number match theirs?" Cut-off review asks "is this in the right period?"
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
