Rights and Obligations
Generally, there is little risk related to this assertion because entities seldom have
an incentive to record liabilities that are not obligations of the entity. Review of the
voucher packets for adequate supporting documents relating liabilities to the entity
provides suf
fi
cient evidence to support this assertion.
Chapter 11
Auditing the Purchasing Process
423
Valuation
The valuation of individual accounts payable is generally not a dif
fi
cult assertion
to test. Accounts payable are recorded at either the gross amount of the invoice or
the net of the cash discount if the entity normally takes a cash discount. The tests of
details of account balances noted in Table
11–10 normally provide suf
fi
cient evidence
as to the proper valuation of accounts payable.
The valuation of accruals depends on the type and nature of the accrued
expenses. Most accruals are relatively easy to value, and proper valuation can be
tested by examining the underlying source documents. Real estate taxes and interest
are examples of accruals that are generally easy to value. In the
fi
rst case, real estate
appraisals or bills usually serve as the basis for the accrual amount (see Exhibit 11–3).
In the second case, the amount of interest accrued relates directly to the amount of
debt and the interest rate stipulated in the loan agreement. Other accruals, however,
may require the auditor to verify the entity’s estimates. Auditing standards provide
the auditor with guidance in auditing an entity’s estimates. Examples of such esti-
mates include accruals for vacation pay, pension expense, warranty expense, and
income taxes. The
Advanced Module
in this chapter provides a discussion of auditing
the income tax provision and related balance sheet accounts.
Classifi cation and Understandability
The major issues related to the presentation and disclosure assertion about classi
fi
ca-
tion are (1) identifying and reclassifying any material debits contained in accounts
payable, (2) segregating short-term and long-term payables, and (3) ensuring that
different types of payables are properly classi
fi
ed. Proper classi
fi
cation can usually
be veri
fi
ed by reviewing the accounts payable listing and the general ledger accounts
payable account. If material debits are present, they should be reclassi
fi
ed as receiv-
ables or as deposits if the amount will be used for future purchases. Any long-term
payables should be identi
fi
ed and reclassi
fi
ed to the long-term liability section of the
balance sheet. Also, if payables to of
fi
cers, employees, or related parties are material,
they should not be included with the trade accounts payable. The auditor should
also ensure that accrued expenses are properly classi
fi
ed.
