Auditing Accounts Payable - Part 1 - Understanding the business process

what's up audit fans auditing accounts payable is really really important for any business managing the cash going out the cash outflow the cash payments is really critical yes we want to earn revenue and have money come in but controlling the money that goes out make sure that we don't spend on frivolous things like ferraris or overseas holidays for our executives but we're spending it on business related goods and services to help us achieve our objective today in this video i'm going to go through the processes related to accounts payable and purchasing and in part two you're going to see the tests of controls and the substantive tests that we're going to use to gather evidence for our audit opinion so let's get into [Music] it welcome to amandalove's audit my name is amanda i do love audit and i teach audit to undergrads at a major australian university i've been making videos here on my channel for almost a decade and i love helping students those studying for their professional qualifications and those looking to move into the audit industry to really understand the fundamentals of audit so today we're looking at accounts payable and i'm just going to jump right into my tablet and it's really important when we think about accounts payable to try and consider what are the processes that happen so i'm going to talk about some of the common steps in an accounts payable process so the first step is normally going to be some form of purchase request so we need something or somebody within the business needs something there is a process of making a request after that there needs to be some sort of approval of requests and usually there is also some sort of hierarchy so they have something called either delegated authority or sometimes it might be called also approval authority which says that certain people can authorize certain things so quite often it's based on a dollar value amount so it might be that person a can approve up to one thousand dollars person b might need to approve anything between one thousand and ten thousand dollars it might need to be that you go you know another level higher for somebody who wants to spend you know a certain amount more and you know at universities for example if i want to purchase something i go to my head of department and if it's less than a certain amount my head can actually approve if it's higher than that but less than another amount it would have to be my dean or my deputy dean of my faculty if the university wanted to buy a brand new building then that would need to go to our equivalent of the board of directors so there's different levels of authority depending on what we need to approve how much it is the purpose of that particular um request so we've got to have approval of our request now it doesn't matter whether it's goods or services here but there needs to be a process for ordering once we've got an approval that will often include things like getting quotes evaluating suppliers and potentially also having an approved list that's quite common the approved list of suppliers so for example in new south wales the state government has an approved list of suppliers that you can use if you work for a government department a school a government agency so ordering is really important now one of the things that's critical here is also that we have segregation of duties that we have different people doing different jobs the person who makes the purchase request is different from the person who does the approval is different from the person who does the ordering of the item and then is also separate from the person who receives the goods all right so it might be that goods are received at a loading dock or a warehouse we have sort of like a parcel delivery area at my university where everything goes and when goods are received depending on the item there might need to be some sort of receiving report it could be a document it could be electronic that says we've received these items on this date now in some organizations where you're expecting a lot of goods you're receiving a report might also be you know partly what was in the order so quite often a common thing to see is the order but with the quantities blacked out so with the quantities left blank and that would mean that the person in the warehouse or the receiving dock or the loading dock has to say oh yep we received a whole lot of you know apple pencils and there were 20 of those received now often why does it have the volume blank or the quantity blank it's so that the person in the receiving department will actually count them themselves that's because if i had a whole box of things rather than counter i might go oh yeah that sort of looks like 56 if i knew that that was the quantity so usually a receiving report will include the items and the quantity that was received and again it could be you know a person doing it or electronic now those reports typically if they're paper reports they'll keep a copy in the warehouse but also they'll need to send a copy to accounting and i forgot to add up here once we've had an order copies of orders should go to our accounting department as well all right because remember they're the ones that have to do all the journal entries here so we've got all so we've got purchases approval ordering receiving goods then the next step is invoices all right and that means that typically people in a business situation for most of our audit clients they will receive goods and not have to pay for them till later so they're buying goods on credit so it creates accounts payable so with invoices we need to understand how often do we get invoices so what's the frequency and usually those are sent straight to accounting all right so they don't need to go back to the person who ordered it or to the purchasing department or the receiving area invoices quite often will get straight sent straight to accounting and probably not many people will use paper invoices these days it's much more likely to be electronic as some sort of pdf now those could also be linked into whatever systems the business uses so that could be zero it could be myob it could be sap so you would get some sort of automated process for that invoice from your supplier so invoices go straight to accounting then we have to have process for payment and this is where it gets a little bit not not more complicated but there's many more steps here and this is done by the accounting department all right so the accounting department is going to receive three pieces of information they're going to receive information about the order so they'll receive the purchase order they're going to receive now i've written these as documents here but these could be electronic files the receiving report which says what we received and then they'll also get a copy of the invoice all right and typically what will happen here is a process of a three-way match so we have a decision process normally here oh that's not a very good diamond let me try that again so we do something called a three-way match okay and so what we're doing is we're feeding all of these documents into this process and we're trying to find out does it match so if on the purchase order i ordered item a and i ordered a quantity of 50. in the receiving report i should see we received item a how many did we receive oh we received 45 well then in the invoice then i would be expected to be billed for only 45 right i don't want to pay for 50 if i didn't receive that many so the three-way match is about trying to make sure that the goods we ordered are the goods that we received and the goods that we were billed for and if it's not so if it doesn't match so if there's a no then what we're going to need to do is make some enquiries and follow up all right so you know we might let's say we're billed for 50 and we only receive 45 i'm going to call the receiving department or the warehouse and say what happened did we receive all these goods are any goods missing um i'll call the supplier and say well you billed us for for 50 but we only received 45 a five on back order so i need to follow up if it doesn't match now if it does match if we get a yes then we can proceed to the process of preparing the payment all right so we're going to prepare the payment now preparing the payment usually involves a couple of different things there's some paperwork which essentially is what they often call a voucher package which will contain from up here the purchase order the receiving report the invoice and then a cover sheet that says yep we've checked all these things everything matches off all right so it's going to be some paperwork and typically at the same time as preparing the paperwork you'll prepare the payment transaction now i'm going to assume that we are not using physical checks anymore um that the payment transaction is going to be eft electronic funds transfer so typically someone will go in they can set up all the payments select the right supplier prepare everything there and have all of that ready to go now the next step here that needs to be done by somebody different is approval of the payment now to approve the payment usually what that person does is that they will review this package of information so the accountant will prepare it they say yep i've done all these things i've checked everything off they're going to review it check check check everything matches they might stamp they might sign if it's in the system they might press a button or add a code so they're going to review those documents and then after they've reviewed it they're going to go in and they're going to look at the bank transfer system and say all right i'm going to make the final approval for the payment final approval release payment now that could happen typically uh with some sort of security code now as to there's a good question here as to how many people many people will do this because in the old days of physical checks it was quite common to have two signatories for checks now of course if you're watching this from north america you are used to seeing c h e k s in um british english we use q e so quite often it's common to have two signatories to make sure that if there's any there's no collusion that there's sufficient oversight so in smaller firms you might just have one person who approves the payments all right but in a larger organization that approval of payment that review process might be done by potentially two people all right so they both have to check um and before the payments can go off now of course that means that after the payments have been processed all of this paperwork has to be filed away somewhere so that if we need to go back to what we can and after the payments are made we need to make sure that we have journal entries that have been recorded all right remember that journal entry is going to be debit accounts payable credit cash now a good question is probably raised here as to where journal entries happen at other places so in terms of where we might have journal entries um for other items and it depends on the computer system so this is why it's really important to make sure that you understand the client um understand their business processes because when they've received the when they've made the order so it could be that when the order is made that we might have a journal entry that is debit whatever the item is that you're ordering credit accounts payable all right so it could be when the order is made but what is more appropriate is typically when you receive the goods because you don't owe the money until you receive the goods so what is better or what is preferred is when goods are received you can go debit inventory or you could go debit stationery expense or whatever it might be and then we'll go credit accounts payable all right so this is why it's important that that receiving report goes to accounting so that they can start preparing these sorts of journal entries so it's a pretty big process in terms of managing accounts payable and this is really important because we want to make sure that we control the cash outflow really carefully we don't want cash going to things that we didn't need the business doesn't need a non-business expenses so we've got the purchase the approval ordering receiving the goods receiving the invoice processing the payment which includes the three-way match the checking of the three-way match and the electronic funds transfer now i do want to raise here one instance in which you might not use a three-way match so there is the option for a two-way match all right now two-way matches typically happen in businesses where there are significant supply chains all right so they have an agreement so you have a company uh so let's say that uh i think it started with ford motor company and they have lots and lots and lots of suppliers okay and they said we're actually going to try and make the process easier and rather than having a three-way match i'm only going to have a two-way match so in a two-way match usually there'll be a process for an order there'll be something to confirm receipt of goods and then once you have the two of those if they match then you can process the payment now how can you process the payment for something like this when you know you don't know how much well that's typically because the suppliers all have dedicated contracts that tell you about prices for things and the prices are governed by those contracts so if i ordered you know two widgets and my contract says that widgets are 50 bucks each as soon as i receive the two then i've got a match and then i'm going to send them payment for 100 automatically so where you have really strong uh supply chains so a business has lots of particular suppliers they use or if you're one of these suppliers as part of their accounts payable process then there is the opportunity for two-way match for accounts payable for companies like ford that have lots of contracts and business is pretty standard now of course if there's like a non-standard purchase something outside of one of those contracts then they are probably going to need to go back to this three-way match process so that's all of the processes related to accounts payable and purchasing in my next video what i'm going to do is i'm going to go through how we will test the internal controls and gather substantive evidence to make sure that payments and accounts payable meet our assertions so thanks for watching if you thought the video was useful i'd really appreciate a thumbs up consider subscribing and stay safe stay well and i'll see you next time

Channel: AmandaLovesToAudit

Views: 22,068

Rating: 4.9718308 out of 5

Keywords: auditing, assurance, auditor, audit, accounting, audited financial statements, financial reporting, accounts payable, invoices, purchasing, auditing accounts payable, auditing purchases

Id: yVklloePyzE

Length: 18min 1sec (1081 seconds)

Published: Thu Sep 10 2020