Auditing liabilities is more difficult than auditing assets. When testing assets, the auditor can generally start with the items recorded in the accounting records and verify their existence through physical examination or other means. But with liabilities, the auditor must look for debts that should have been recorded but weren’t. Many of my students have trouble understanding tests of completeness. I spend a lot of time explaining and re-explaining why auditors select samples of January cash payments and trace them to December 31 accounts payable.
I have tried without success to find a good case in one of the accounting education journals that teaches students how to test accounts payable. If I’ve overlooked such a case, please post a comment below.
“Accounts Payable Fraud: Ten Ways to Identify It,” Christine Warner, New Perspectives (Summer 2007): 14-17. This article explains audit procedures to identify accounts payable fraud such as searching for duplicate payments, round-amount invoices, abnormal invoice volume, and invoices just below approval amounts.
“Garbage In, Garbage Out Waste Disposal Incorporated: An Audit Case,” Srinivasan Ragothaman, William Wilcox & Thomas Davies, Issues in Accounting Education (August 2003): 307-316. A fictitious waste disposal company manages its earnings by manipulating its depreciation expense and environmental liabilities.