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    Chapter 6: Audit of Current Liability

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    Yidersal Dagnaw
    The document discusses audit procedures for current liabilities, including accounts payable and accrued liabilities. It covers the nature and sources of accounts payable, internal controls over the acquisition cycle, common misstatements involving accounts payable, and audit procedures such as vouching payments, confirming balances, and analytical procedures. For accrued liabilities, it describes estimating accruals for expenses like taxes and payrolls received before the balance sheet date, and audit steps like examining supporting documents, evaluating accrual computations, and ensuring consistent treatment.

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    Chapter 6: Audit of Current Liability

    Uploaded by

    Yidersal Dagnaw
    1K views14 pages
    The document discusses audit procedures for current liabilities, including accounts payable and accrued liabilities. It covers the nature and sources of accounts payable, internal controls over the acquisition cycle, common misstatements involving accounts payable, and audit procedures such as vouching payments, confirming balances, and analytical procedures. For accrued liabilities, it describes estimating accruals for expenses like taxes and payrolls received before the balance sheet date, and audit steps like examining supporting documents, evaluating accrual computations, and ensuring consistent treatment.

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    Auditing procedures for Inventory audit

    Original Title

    AUTHORIZATION CH5=FIXED ASSETS

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    The document discusses audit procedures for current liabilities, including accounts payable and accrued liabilities. It covers the nature and sources of accounts payable, internal controls over the acquisition cycle, common misstatements involving accounts payable, and audit procedures such as vouching payments, confirming balances, and analytical procedures. For accrued liabilities, it describes estimating accruals for expenses like taxes and payrolls received before the balance sheet date, and audit steps like examining supporting documents, evaluating accrual computations, and ensuring consistent treatment.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    1K views14 pages

    Chapter 6: Audit of Current Liability

    Uploaded by

    Yidersal Dagnaw
    The document discusses audit procedures for current liabilities, including accounts payable and accrued liabilities. It covers the nature and sources of accounts payable, internal controls over the acquisition cycle, common misstatements involving accounts payable, and audit procedures such as vouching payments, confirming balances, and analytical procedures. For accrued liabilities, it describes estimating accruals for expenses like taxes and payrolls received before the balance sheet date, and audit steps like examining supporting documents, evaluating accrual computations, and ensuring consistent treatment.

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    of 14

    CHAPTER 6 : AUDIT OF CURRENT

    LIABILITY
    6.1 Accounts payable and other
    liabilities
    . 6.1.1. Accounts payable
    Sources and nature of accounts payable
    The term accounts payable (often referred to as
    vouchers payable for a voucher system) is used to
    describe short-term obligations arising from the
    purchase of goods and services in the ordinary
    course of business.
    Typical transactions creating accounts payable
    include the acquisition on credit of merchandise,
    raw materials, plant assets, and office supplies.
    Cont’d
     Other sources of accounts payable include
    the receipt of services, such as legal and
    accounting services, advertising, repairs, and
    utilities.
     Interest–bearing obligations should not be
    included in accounts payable but shown
    separately as bonds, notes, mortgages, or
    installment contracts.
    •
    Internal control over accounts
    payable
    In thinking about internal control for accounts
    payable, it is important to recognize that the
    accounts payable of one company are the
    accounts receivable of other companies.
    Discussion of internal control applicable to
    accounts payable may logically be extended to
    the entire purchase or acquisition cycle.
    Controls Over the
    .
    Acquisition Cycle
    1. Segregation of duties--purchases and disbursements
    .
    2. Approval of purchase orders
    3. Numerical control of purchase orders and receiving reports
    4. Matching of details of vendors’ invoices to purchase orders and
    receiving documents
    5. Approval of vendors’ invoices
    6. Pre-numbered checks
    7. Reconciliation of details of individual disbursements to controlling
    accounts
    8. Reconciliation of vendors’ statements to accounts
    9. Use of chart of accounts and review of account coding
    Auditor’s objective in audit of
    Accounts payable and related liabilities
    INSERT
    Most Likely Misstatements
    .
    Accounts Payable and Related Accounts
    .
    Incorrect recording- purchase/disbursement
    Misappropriation of purchases
    Embezzlement (disbursement or purchase)
    Duplicate payments for purchases
    Unrecorded disbursements
    Out-of-Period recording of purchases or
    disbursements
    Failure to accrue liabilities
    Audit procedures of Accounts
    .
    Payable and Related Accounts
    1.. Obtain trial balance of accounts payable and reconcile with the
    ledgers
    2. Vouch balances payable to selected vendor invoices
    3. Reconcile recorded liabilities with vendors’ statements
    4. Confirm accounts payable
    5. Perform analytical procedures
    6. Perform search for unrecorded liabilities
    7. Evaluate other current liabilities
    8. Identify related party payables
    9. Evaluate financial statement presentation and
    disclosure
    Confirmation of accounts payable
    .
    Disagree.
     Unlike the presumption that accounts receivable will be confirmed
    . limited exceptions, there is no such presumption about the
    with
    confirmation of accounts payable.
     This test is optional because (a) confirmation offers no assurance that
    unrecorded payables will be discovered, and (b) external evidence in
    the form of invoices and vendor monthly statements should be
    available to substantiate the balances.
     Confirmation of accounts payable is recommended when control risk
    is high, there are individual creditors with relatively large balances,
    and when a company is experiencing difficulties in meeting its
    obligations.
    Contrasting Confirmation of Accounts
    .
    Payable and Accounts Receivable
    . Accounts Payable Accounts Receivable

    Primary Audit Completeness Existence


    Objective

    Other Evidence External evidence Internal evidence


    Available held by client (i.e., (i.e.., sales invoices,
    vendor invoices receiving reports,
    and statements) etc.)
    Confirmation
    Generally
    Required? NO YES
    Accrued liabilities
    .
     Most accrued liabilities represent obligations
    payable sometime during the succeeding
    period for services or privileges received
    before the balance sheet date.
    Examples include interest payable, accrued
    property taxes, accrued payrolls and payroll
    taxes and income taxes payable.
    CONT’D.
    Because accrued items are based on client
    estimates of amounts which will subsequently
    become payable, subjective factors may make
    it difficult to establish control over them.
    As a result, these estimates may be
    particularly susceptible to misstatement,
    especially in circumstances in which
    management is under pressure to show
    increased earnings.
    The basic auditing steps for accrued
    liabilities
    . documents on hand that
    1. Examine any contracts or other
    provide the basis for the accrual.
    2. Appraise the accuracy of the detailed accounting records
    maintained for this category of liability.
    3. Identify and evaluate the reasonableness of the
    assumptions made that underline the computation of the
    liability.
    4. Test the computations made by the client in setting up the
    accrual.
    5. Determine that accrued liabilities have been treated
    consistently at the beginning and end of the period.
    6. Consider the need for accrual of other accrued liabilities not
    presently considered (that is, test completeness).
    END OF CH6

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