AUDIT VERIFICATION – LIABILITIES

AUDIT VERIFICATION – LIABILITIES

CHAPTER OBJECTIVE

1. LIABILITIES
2. TRADE PAYABLES –SUBSTANTIVE PROCEDURE
3. OVERDRAFTS AND LONG-TERM BANK LOANS
4. ACCRUALS
5. CONTINGENT LIABILITIES

1. LIABILITIES

 Amounts falling due within one year ( current liabilities) must be shown separately in the financial statements from amounts falling due after more than one year ( non-current liabilities) for each item.
 Liabilities can be classified actual liabilities (e.g. debenture loans) and possible liabilities (e.g. contingent liabilities).

2. TRADE PAYABLES –SUBSTANTIVE PROCEDURE

Always bear in mind that the audit emphasis here will be on completeness – have all payables that exist been fully recorded in the financial statements?
The main verification procedures are as follows:
 Check control account and the payables’ ledger
 Review the individual accounts with largest volume of transactions during the period.
 Review the year-end cut-off procedures for purchases:
 Does the balance agree with the supplier’s statements?
 Payables circularisation
 Review payments to payables just after the year end.
 Analytical procedure, comparing age analysis with previous
periods, and payables days =( payables/ costs of sales ) x 365
to detect possible unrecorded payables.
 Auditor’s knowledge that ABC is a major supplier, but owing to ABC is small, so investigate.

3. BANK OVERDRAFTS AND LONG-TERM BANK LOANS

Bank Overdrafts:
Verification of bank overdrafts is via the bank confirmation letter.
Long –Term Bank Loans:
 Bank confirmation letter
 Consider the adequacy of any accrual for unpaid interest.

4. ACCRUALS

Accruals are commonly made for rent, gas, electricity, telephone and other items incurred but no invoice has yet been paid.
Audit Procedures:
 Obtain a schedule of accrual, compare with prior year by using analytical procedures. Employee and directors bonuses, sales staff commission and employee holiday pay often are missed recording.
 Test checking a sample of accruals, supporting invoices received in the next period.
 Management representation letter to confirm completeness of accruals.

5. CONTINGENT LIABILITIES

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets: probable losses should be accrued, possible losses should be disclosed in notes to the financial statements.
Typical Contingent liabilities include:
 Bills discounted by issuing a bill of exchange sold to bank, but when client’s customer does not pay the bank, so contingent liabilities may arise.
 Guarantee a subsidiary company’s overdraft. If subsidiary fails to repay overdraft, so contingent liabilities may arise.
 Damages and costs in respect of legal actions still undecided.
 Claims under guarantees or warranties arising out of past transactions.
The auditor’s judgement in this area may often be helped by advice from experts, typically lawyers.

Source:

1. Kaplan, FAU
2. Phnom Penh HR