FEDILLAGA, LUKE YSMAEL V.
BSA -
4
ARC438
SUMMARY OF AUDIT OF LIABILITIES
SUBSTANTIVE AUDIT PROCEDURES:
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
1. SL - GL
RECONCILIA
TION
COMPLETENE
SS AND
VALUATION
DEFINITION/EXPLANATION
 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.
 Generally, what to do?
1. Obtain a copy of AP GL and SL.
2. Test the clerical accuracy (footing & cross footing)
c) Reconcile SL and GL, any material difference,
investigate the reconciling items, particularly any
unusual non-standard journal entry.
 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.
2.
PURCHASES
& ACCOUNTS
PAYABLE
CUT-OFF
TEST
EXISTENCE,
COMPLETENE
SS AND
OBLIGATION
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
There are numerous old balances.
* 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.
3.
CONFIRMATI
ON OF
LIABILITIES
FROM
CREDITORS
EXISTENCE
,
VALUATIO
N AND
OBLIGATIO
N
 For Notes Payable:
a)
As compared to AP, NP is supported by a
promissory notes and may be given for a variety of
reasons, example:
i. Purchase of merchandise in the ordinary course of
business.
ii. In settlement of a long outstanding amount;
iii. In return for loans from affiliates, shareholders,
banks or other financial institution; or
iv. To raise money in the short- term money markets
(commercial paper)
* Upon receipt of the confirmation replies the
auditor should agree with the information confirmed
bythe creditor to the accounting records, and follow up
and resolve any differences noted.
b)
In NP verification and its related accounts,
the auditor may either:
i. Confirm the notes payable; or
ii. Review supporting documentation as to * Amounts owed
* Terms
* Collateral
* Restrictions and;
Debtor’s compliance with the loan provisions and identify
liens, security interests, and assets pledged as loan collateral.
INSPECTION OF SUPPORTING DOCUMENTATIONS
ASSERTION DEFINITION/EXPLANATION
 How to perform?
a. Accounts Payable
- vouch entries in the Voucher Register or in the
Purchase Journal to supporting .
1. Vouchers
2. Invoices
3. Receiving Reports
4. Purchase order
1. INSPECTIO
N OF
SUPPORTING
DOCUMENTS
EXISTENCE,
VALUATION
AND
OBLIGATION
b. Lease Liability
- examine the lease contract and determine
whether:
1. Is it really a lease transaction? (Right to use the
asset has been provided by a lessor to a lessee).
2. Is appropriately classified as finance or
operating leases.
- determine whether finance / capital lease
obligations are appropriately recorded and required
disclosures are made.
c. Notes payable and Other obligations (Short term or Long - term)
- extract information relevant to the disclosures of
notes payable and other obligations in the financial
statements.
- contact lender and/or legal counsel for the entity, as
appropriate, with respect to interpretation of loan
agreement terms, restrictions and any other information
that may be sought regarding special provisions of notes or
loan agreements.
- examine the client’s copies of loan agreements (ex.
Promissory note) or other short-term lending arrangements
(ex. Factoring) to obtain an understanding of the pertinent
provisions which include:
a. Amount of loans authorized
b. Interest rates
c. Due Dates / Maturity Period
d. Assets Pledged
Restrictions imposed (if any

2. SEARCH
FOR
UNRECORDED
LIABILITIES
COMPLETEN
ESS AND
OBLIGATION
How to perform:
- it is important to remember that this procedure may
only be conducted after the reporting date and the
auditor performs the following procedures:
1. Examine files of unpaid or unrecorded invoices,
unmatched purchase orders and unmatched receiving
reports and trace it to the related journal (ex. Purchase
Journal) to determine it was properly recorded.
2. Examine the significant recorded purchases between
the reporting date and the date of search for unrecorded
liabilities to determine if this purchase should be properly
included in the current year Financial Statements.
3. Obtain and review minutes of meetings and inspect
contracts to identify unrecorded liabilities such as
liabilities on pending ligations.
4. Review cash disbursement subsequent to the reporting
date (Subsequent payment testing) and check whether
this may represent a liability that should be reported on
the current year; and
2. TEST THE
COMPUTATIO
N OF
INTEREST
EXPENSE,
INTEREST
PAYABLE AND
AMORTIZATIO
N OF
DISCOUNT
AND
PREMIUM
5. Request the client to make an appropriate adjustment
entry for any unrecorded liability identified by the auditor.
 How to perform:
1. Obtain the interest rate (nominal or effective rate) and
perform recomputation.
2. For long -term debts like bonds payable, in the initial
VALUATION issuance (determining the discount or premium), prepare
AND
an amortization table and compare it with the amounts
ACCURACY recorded.
If recurring audit, auditor may use the prior year working
paper.

3. LIABILITIES
DENOMINATE
D IN FOREIGN
CURRENCIES
As required by PAS 21 (The Effects of Changes in
Foreign Exchange Rates), monetary liabilities in foreign
currency should be translated using the closing rate at
VALUATION
the reporting date.
 How to perform?
1. Obtain the closing rate and reperform the translation
of the foreign currency denominated payable.
2. Ensure that any foreign currency transaction gain or
loss should be reported as part of P/L/
4. REVIEW
COMPLIANCE
WITH THE
TERMS OF
DEBT
AGREEMENTS
5. PERFORM
ANALYTICAL
REVIEW
PROCEDURES
 How to perform?
1. Review the entity’s compliance with the terms,
PRESENTATI restrictive covenants or other provisions of debt
ON AND
agreements to determine whether a default or violation of
DISCLOSURE any debt covenant has occurred.
- If there has been a default or violation of any debt
covenants, the auditor should ensure that this is properly
disclosed in the notes to FS and the item should be
appropriately presented as current liability in the SFP.
EXISTENCE,
COMPLETEN  Testing the reasonableness of liabilities and related
ESS,
accounts.
OBLIGATION  Basic Procedures:
S AND
a. Comparison of this year’s final balance from previous
VALUATION years audited balances.
b. Comparison of the relationship between CY accounts
payable balances and the CY purchases with the previous
year’s figure.
c. Comparison of actual closing balances of loand and
borrowings with the corresponding budgeted figures, if
available.
d. Comparison of significant ratios relating to loans and
borrowings, with similar ratios for other firms in the same
industry if available.
e. Comparison of significant ratios of loans and
borrowings with the industry norms, if available.
f. Comparison of the relationship between CY AP and the
CY total current liabilities with previous year’s figures.
g. Comparison of the relationship between the CY
purchase discount and the CY total purchases with
previous year’s figures.
h. Comparison of the CY interest expense to the product
interest expense and average principal of debt outstanding;
and
i. Comparison of CY finance lease expense with the
corresponding previous year’s figures.
After performing some comparisons, the auditor should
investigate any significant differences, unexpected
changes or the absence of expected changes.
ILLUSTRATIVE PROBLEMS:
The LYF Company's president, Luke, has a bonus agreement with the business under which
she receives 12% of the company's annual net profits (after taxes and bonuses are deducted). The net
income for the current year is P5,850,000 before deducting either the bonus or the income tax
provision. Taxes on the bonus are deducted, and the rate is 47%.
1. Bonus of Luke
a) 12% (5,850,000 - B - (47% x 5,850,000 - B)
= 702,000 - 12%B - (2,749,500 + 47%B)
= 702,000 - 12%B - 329,940 + 47%B
= 372,060 - 74%
1.074B = 372,060
= 399, 592.44
2. Appropriate provision for Income Tax in the year
a) 47% (5,850,000 - 399,592.44)
= 2,561,691.55