Accounts Payable Audit: Search for Unrecorded Liabilities
How to audit accounts payable: why completeness is the main risk, the key procedures, and how to run the search for unrecorded liabilities step by step.
Read more →Audit risk is the risk that the auditor gives a clean opinion on financial statements that are materially misstated. The audit risk model shows how the auditor keeps that risk low by adjusting the amount of testing.
Audit risk = inherent risk × control risk × detection risk
The standards are AU-C 200, 315 and 330 for private companies, ISA 200, 315 and 330 (and their CAS equivalents), and AS 1101 for public companies.
| Part | What it means | Who controls it |
|---|---|---|
| Inherent risk | How likely an assertion is to be misstated before any controls, because of complexity, judgment, change or fraud risk | The entity's circumstances |
| Control risk | How likely the entity's controls are to miss or fail to correct a misstatement | The entity's controls |
| Detection risk | How likely the auditor's own procedures are to miss a misstatement | The auditor |
Inherent risk and control risk together are the risk of material misstatement. The auditor assesses that risk but cannot change it. Detection risk is the only part the auditor sets, through the nature, timing and extent of substantive testing.
The auditor picks an acceptable audit risk, assesses the risk of material misstatement, and solves for the detection risk that is left.
Detection risk = audit risk ÷ (inherent risk × control risk)
Example for revenue occurrence:
Detection risk = 5% ÷ (100% × 50%) = 10%
A 10% detection risk means the substantive testing must be fairly strong. If controls had not been tested, control risk would be taken as 100%, detection risk would fall to 5%, and the auditor would need more substantive testing: larger samples, more work at year end instead of at an interim date, and more reliable evidence.
Most firms use levels such as low, moderate and high instead of percentages. The logic is the same.
For audits of periods ending on or after December 15, 2023, AU-C 315 (as revised by SAS 145) requires:
ISA 315 (Revised 2019) made the same changes for periods beginning on or after December 15, 2021.
Risks at the top of the inherent risk spectrum are significant risks, and need procedures aimed at them specifically. Two are presumed on every audit: management override of controls and fraud in revenue recognition. See our guide to auditing revenue.
Warp Accounting runs the testing that controls detection risk: tests of details on samples the firm sizes from its risk assessment, and controls testing when the firm plans to rely on controls. Every result links to its source document. See test of details, controls testing and our guide to materiality.
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How to audit accounts payable: why completeness is the main risk, the key procedures, and how to run the search for unrecorded liabilities step by step.
Read more →The three stages of analytical procedures in an audit, what AU-C 520 and ISA 520 require, and how to build an expectation precise enough to count as evidence.
Read more →The financial statement assertions under AU-C 315, ISA 315 and PCAOB AS 1105, what each one means, and the audit procedures that test it.
Read more →