LEAH MAE G. NOLASCO
BSA - 4
ARC438
SUMMARY OF AUDIT OF LIABILITIES
INTRODUCTION:
 Can be classified as current or noncurrent liabilities which are obligations by
entity.
 Objectiveof the auditor is the same regardless of the classification.
 Important Features:
 Represented only by documentary evidence which originates mostly from
third parties in their dealings with the entity.
What is the focus of the audit of liabilities?

Primarily, checking the
understatement as well as omissions
of disclosure - material omission or
misstatement will affect the fairness of
the FS (affects completeness
assertion).

Off-Balance Sheet Financing:
a) Commitments, guarantees and other
potential obligation not recorded on the
Balance Sheet (Unrecorded and Undisclosed
Liabilities).
Because of the evolving complex nature of accounting standards for high-level
financing transactions:


Auditors need to be especially alert when auditing such situations.
Auditors should also obtain evidence about the related accounts such as:
a) Finance lease
b) Interest expense
c) Interest Payable
d) Premium or Discount on Bonds Amortization and Balances
AUDIT OBJECTIVES IN AUDITING LIABILITIES
ASSERTION
EXISTENCE
AUDIT OBJECTIVES


COMPLETENESS
VALUATION & ALLOCATION 

RIGHTS AND
OBLIGATIONS

PRESENTATION AND
DISCLOSURE
All recorded liabilities on the SFP are authentic debts due to creditors of the
entity.
All liabilities owed by the entity at the reporting date are included on the
SFP.
Liabilities are included on the SFP at the appropriate amounts.
Liabilities reported in the SFP represent obligations of the entity at the
reporting date.
Liabilities and related accounts are properly classified, described and
disclosed in the FS including notes, in accordance with the applicable PFRS.
SUBSTANTIVE AUDIT PROCEDURES FOR LIABILITIES

The auditor’s PSP for liabilities typically include the following:
1. Reconciling GL and SL;
2. Performing purchase and accounts payable cut-off;
3. Confirming liabilities to debtors;
4. Inspecting supporting documents such as contracts, invoices, receiving reports, etc.;
5. Searching for unrecorded liabilities;
6. Testing the accuracy of interest expense, interest payable, amortization of discount
or premium.
7. Evaluating valuation of liabilities denominated in foreign currencies.
8. Reviewing compliance with terms of debt agreements.
9. Performing analytical review procedures to liabilities and related accounts; and
10. Evaluating proper FS presentation and adequacy of Disclosure.
RECONCILIATION OF SL WITH GL
ASSERTION
DEFINITION/EXPLANATION
1. SL - GL
RECONCILIATION
COMPLETENESS
AND
VALUATION
 Purpose:
a) To see if liabilties in total
appearing in the FS conforms or
reconcile with its breakdown.
b) Starting point of all other
substantive procedures.
IMPORTANT NOTE
 Generally, what to do?
1. Obtain a copy of AP GL and
SL.
2. Test the clerical accuracy
(footing & cross fooring)
3. Reconcile SL and GL, any
material difference,
investigate the reconciling
items, particularly any
unusual non-standard journal
entry.

2. PURCHASES &
ACCOUNTS
PAYABLE CUT-OFF
TEST
EXISTENCE,
COMPLETENESS
AND
OBLIGATION
 Purpose:
a) To verify whether the
transaction if completely
recorded in the proper
accounting period.
In performing cut-off test, AP and
Purchases cut-off test is normally
conducted jointly in verifying the
purchases (inventory) and
payables recorded.
How to perform the
test?
1. Obtain and examine
invoices form suppliers and
other entities and other
documentation supporting
transactions recorded in the
purchase journal and cash
disbursements journal
immediately before after the
reporting date. Determine if
the transactions are properly
recorded in the proper
period; and
2. Review cut offs in related
areas such as purchase and
inventories, paying particular
attention to goods in transit.

However, there are instances
that AP Confirmation is
necessary when the following
conditions exist:
 For Accounts Payable:
1. Controls over the recording of
vendor’s invoices and receiving
reports are ineffective.
2. There are few transactions
involving large amounts; or
3. There are numerous old
balances.
4. CONFIRMATION
OF LIABILITIES
FROM CREDITORS
EXISTENCE,
VALUATION
AND
OBLIGATION
 For Notes Payable:
* As compared to AP, NP is
supported by a promissory notes
and may be given for a variety of
reasons, example:
1. Purchase of merchandise in
the ordinary course of business.
2. In settlement of a long
outstanding amount;
3. In return for loans from
affiliates, shareholders, banks or
other financial institution; or
4. To raise money in the shortterm money markets
(commercial paper)
* In NP verification and its
related accounts, the auditor
may either:
1. Confirm the notes payable; or
2. Review supporting
documentation as to a) Amounts owed
b) Terms
c) Collateral
d) Restrictions and;
e) Debtor’s compliance with
the loan provisions and identify
liens, security interests, and
assets pledged as loan
collateral.
 For Accounts Payable:
* Upon receipt of
confirmation replies, the
auditor should reconcile the
information confirmed by the
creditor to the accounting
records, and follow up and
resolve any differences
noted.
 For Notes Payable:
* Upon receipt of the
confirmation replies the
auditor should agree with
the information confirmed by
the creditor to the
accounting records, and
follow up and resolve any
differences noted.