Scribd
Upload
5 views

Substantive Procedures For Liabilities

For educational purposes

Uploaded by

Paul De Asis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
5 views

Substantive Procedures For Liabilities

For educational purposes

Uploaded by

Paul De Asis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

Substantive

Procedures for
Liabilities
1) Reconciling GL and SL

 Objective: Completeness, Valuation

 Procedures:
 1. Ask for the GL and SLs of Payables
 2. Test for clerical accuracy by performing footing & cross-footing
 3. Reconcile the total balance of the SLs to the balance presented
in the GL.

 Note: This procedure is usually performed first.


2) Purchase and Accounts
Payable Cut-off
 Objective: Existence, Completeness, Obligation

 Procedures:
 1. Days before and after the reporting date, check for any SOA,
Invoice, Billing or any other relevant document which may give
rise to a liability.
 2. Check for inventories in transit and verify their shipping terms
whether FOB Shipping Point or FOB Destination.
3) Confirmation of Liabilities

 Objective: Existence, Valuation, Obligation

 Note: Confirmation of liabilities is not as common as confirmation of


receivables since most liabilities are already substantiated by
external evidences which can be relied upon.
 Confirmation of liabilities are usually done only when:
 1. Controls over processing of invoices are ineffective.
 2. There are few transactions involving large amounts.
 3. There are numerous old balances.
3) Confirmation of Liabilities

 Procedures:
 1. Send letter of confirmations to the creditors and lenders of the
client.
 2. The reply must be directed to the auditor. If not feasible, can be
directed to client, and the client shall deliver the letter to the
auditors.
 3. Reconcile any material differences noted.

 Types of confirmation:
 1. Positive – a reply is needed to substantiate the amount
 2. Negative – a reply is only required if there are discrepancies.
4) Inspection of Supporting
Documents
 Objective: Existence, Valuation, Obligation

 Accounts Payable:
 1. Vouch the entries in the purchase journal to the supporting
documents.
 a. Vouchers
 b. Invoices
 c. Receiving reports
 d. Purchase orders
4) Inspection of Supporting
Documents
 Lease Liability:
 1. Examine the lease contract and determine whether.
 a. Is it really a lease transaction?
 b. Is it appropriately classified as finance or operating lease?
 Other obligations:
 1. Extract information relevant to the disclosures.
 Notes Payable – check the note for the amount, due date,
interest rates, and assets pledged.
 Provisions/Contingencies – check status with legal documents.
5) Search for Unrecorded
Liabilities
 Objective: Completeness, Obligation

 Procedures:
 1. Examine files of unpaid or unrecorded invoices and trace it to
the related journal to determine whether it was properly recorded.
 2. Examine significant purchases between the reporting date and
the date of search for unrecorded liabilities.
 3. Obtain minutes of meetings and inspect contracts.
 4. Review cash disbursement subsequent to the reporting date.
 5. Request client to make appropriate adjusting entries.
6) Testing the Accuracy of Computations
for Interest and Amortizations

 Objective: Valuation, Accuracy

 Procedures:
 1. Obtain the interest rate and perform recomputation.
 2. For long-term debts like bonds payable, prepare an
amortization table and compare it with the amounts recorded.
7) Evaluate Valuation of Liabilities
Denominated in Foreign Currencies

 Objective: Valuation

 Procedures:
 1. Obtain the closing rate and reperform the translation of the
foreign currency denominated payable.
 2. Ensure that any foreign currency gain or loss were reported in
the Statement of Profit or Loss.
8) Review Compliance with the
Terms of Debt Agreements
 Objective: Presentation and Disclosure

 Procedures:
 1. Review the entity’s compliance with the terms, restrictive
covenants, or other provisions of the debt agreements.
 2. Determine whether the default or violation of the client were
properly disclosed and reported the effect in the financial
statements.
9) Perform Analytical
Procedures Related to
Liabilities
Objective: Existence, Completeness, Obligation, Valuation

 Procedures:
 1. Compare closing balances of payable with the previous year or
budgeted figures.
 2. Compare significant ratios relating to payables with the
industry norms or other entities with similar industry.
 3. Compare the vertical analysis of payables of the current year
with the previous year.
 4. Investigate any significant differences, unexpected changes, or
the absence of expected changes.
10) Evaluate the FS
Presentation and Adequacy of
Disclosures
Objective: Presentation and Disclosure

 Procedures:
 1. Review the proper presentation (Current vs. Noncurrent)
 2. Ensure that any debit balance of payables (due to
overpayment, errors, or irregularities) should be appropriately
presented as non-trade receivable.
 3. Review completeness of disclosures in accordance with the
applicable reporting standards.

You might also like