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Internal Control Affecting Liabilities and Equity

This document discusses internal controls over accounts payable and liabilities. It notes that accounts payable arise from the purchase of goods and services on credit in the ordinary course of business. Accrued liabilities also accumulate over time and require management estimates. The document recognizes that a company's accounts payable are other companies' accounts receivable, so errors are unlikely to go permanently unnoticed as creditors will demand payment. However, inaccurate records of payables are still discouraged. Internal controls over the entire procurement or acquisition cycle can be considered as well.

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Magayon Jovelyn
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93 views2 pages

Internal Control Affecting Liabilities and Equity

This document discusses internal controls over accounts payable and liabilities. It notes that accounts payable arise from the purchase of goods and services on credit in the ordinary course of business. Accrued liabilities also accumulate over time and require management estimates. The document recognizes that a company's accounts payable are other companies' accounts receivable, so errors are unlikely to go permanently unnoticed as creditors will demand payment. However, inaccurate records of payables are still discouraged. Internal controls over the entire procurement or acquisition cycle can be considered as well.

Uploaded by

Magayon Jovelyn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY

The term accounts payable (often referred to as vouchers payable for a voucher system)
is used to describe short-term obligation arising from the purchase of goods and services in the
ordinary course of business . Typical trans actions creating accounts payable
include the acquisition on credit of merchandise, raw materials, plants assets and office
supplies. Other sources of accounts payable include the receipt of services, such as legal and
accounting services, advertising, repairs and utilities. Interest-bearing obligation should not be
included in accounts payable but shown separately as bonds, notes, mortgages, or installment
contracts. Invoices and statements from the purchase of goods or services and most other
liabilities. However, accrued liabilities ( s o m e t i m e s c a l l e d accrued expenses)
generally accumulate over time, and management must make accounting
estimates of the year-end liability. Such estimates are often necessary for salaries,
pension, interest, rent, taxes and similar items. In thinking about internal control over accounts
payable, it is important to recognize that the accounts payable of one company are the
accounts receivable of other companies. It follows that there is little danger of errors
being overlooked permanently since the client’s creditors will generally maintain
complete records of their receivables and will inform the client if payment is not received. This
feature also aids auditors in the discovery of fraud, since the perpetrator must be able to obtain
and respond to the demands for payment. Some companies, therefore, may choose to minimize
their record keeping of liabilities and to rely on creditors to call attention to any delay in
making payment. This viewpoint is not an endorsement of inaccurate or incomplete records of
accounts payable, but merely recognition that the self-interest of creditors constitutes an effective
control in accounting for payables that is not present in the case of accounts receivable. Discussion
of internal control applicable to accounts payable may logically be extended to the entire
purchase or acquisition cycle.

• Debt Obligations
• It was identified that Soyo Group was not in compliance with three of its six debt
covenants with
UCB as of December 31, 2007
• Audit team:
• Did not follow up on identified debt covenant violations
• Did not obtain evidence indicating whether a waiver had been granted by UCB
• Audit work papers did not provide any evidence that audit team considered whether
these violations could impact the going concern status of Soyo
• Audit report for 2007 included an unqualified opinion
• Adjustments to Stockholders
’Equity Accounts:
Delphi Corporation
• Accused of violations related to improperly accounting for an increase in warranty
reserves related to warranty claims made by its former parent company
• Misclassification of the reserve (as a direct adjustment to retained earnings) increase
resulted in materially overstating its net income for 2000 by $69 million
• What are the risks of material misstatement associated with debt obligations and
stockholders equity accounts?
• What are the typical substantive procedures that auditors should perform when
auditing debt obligations and stockholders equity accounts?
• How could a lack of appropriate professional skepticism by auditors lead to material
misstatements related to debt obligations and stockholders equity accounts?

RELEVANT ACCOUNTS WHEN AUDITING DEBT OBLIGATIONS


• Bonds payable
• Interest expense
• Gains or losses on refinancing debt
• Notes payable
• Mortgages payable

AUDITING DEBT OBLIGATIONS


• Objective - Determining whether all obligations are recorded and properly classified
• Relevant assertions
• Proper valuation of premium or discount
• Valuation of gains or losses on refinancing debt
• Proper presentation and disclosure, including important restrictions contained in the
debt obligations

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