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Audit of Liabilities
1.Assertion: Existence and Obligations(Liability)

(a) against supporting documents such as loan agreements ,creditors statements etc.
(b) Confirmations(from banks, creditors etc)
(c) Inspection of documentation such as invoices etc

2.Assertion:Valuation

Select liabilities and verify the amount:

(a) against documentation such loan agreements, debenture certificates etc

(b) by enquiry from money lenders, with the client’s consent
(c) against the entries in the cash book for the money received.

3.Assertion:Completeness

Perform analytical procedures on liabilities by comparing them:

(a) with budgets or prior year’s amounts

(b) between accounts(e.g. interest expense vs. liabilities)
(c) calculating ratios and comparing them with industry data.

NB: Follow up material fluctuations.

Test for understatement by:

 selecting physical invoices and following them through to the entries in the accounting
records
 inspecting creditors reconciliations for outstanding items and determining if they have been
accounted for or provided for as a creditor
 selecting payments from the cash book and testing whether they are recorded in the
expense accounts
 Inspecting expense payments after year-end and ensuring that they do not relate to prior
year -end periods.

4. Assertion: Presentation and Disclosure

Inspect the financial statements and ensure that liabilities are correctly classified and disclosed in
accordance with IAS 1 and the statutory requirements.

5. Cut-Off

Verify cut-off, for example, a trade creditor should not be included unless the goods were acquired
before the year –end.
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6. Reasonableness

Consider the reasonableness of the liability. Consider if there are any circumstances which ought to
rouse suspicion.

7. Internal Control

Determine, evaluate and test internal control procedures. This is particularly important for trade
creditors.

8. Previous Date Clearance

Consider the liabilities of the previous accounting date. Have they all been cleared?

9. Authority

The authority for all liabilities should be sought. This will be found in the company’s minutes or
directors’ minutes and for some items the authority of the memorandum and articles may be
needed.

10.Description

The auditor must see that the description in the accounts of each liability is adequate.

Audit of Liabilities-(Share Capital)

Share capital is effectively a special type of a liability of a company.

Where new share capital has been issued during the year, its verification is as follows:

(a)ensure that the issue is within the limits authorised by the memorandum and articles of
association

(b)ensure the issue was subject to a directors’ minute

(c)ascertain and evaluate the system for the control of issue

(d)verify that the system has been properly operated. This will involve examining the prospectus(if
there is one) , application and allotment sheets, the share register, cash received records, share
certificate counterfoils, and repayments to unsuccessful applicants.

When no new issue of shares has been made, the audit work would include:

(a)Determine the total of shares of each class as stated in the balance sheet and obtain a list of
shareholdings which in total should agree with balance total

(b)Test the balances in the share register with the list and vice-versa

(c)If this not possible at the balance sheet date, it may be permissible to do it earlier provided that
the auditor is satisfied with the system of internal controls over transfers.
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Auditing of Accounting Estimates

 Accounting estimates have to be made in all areas where precise means of measurement
cannot be applied.
 Some are routine e.g. depreciation, and some are one- off e.g. the outcome of a lawsuit.
Many are capable of reasonable estimations but some might not be.
 The responsibility of these estimates lies with the directors or other governing body and may
involve special knowledge and judgement.
 Auditors should obtain sufficient appropriate audit evidence on all material accounting
estimates. The evidence should give assurance that the estimates are reasonable in the
circumstances and , when required, appropriately disclosed.

Possible Audit Procedures:

(i)Review procedures and methods adopted by management to make accounting estimates. These
may include internal audit. In some cases a formula may be used. There must be systems for
continually reviewing these formulae.

(ii)Test these processes in connection with each estimate.

(iii)Evaluate the data and consider the assumptions on which the estimates have been made.

(iv)Check any calculations or applications of formulae.

(v)Make an independent estimate on each estimate and compare it with that of the directors.
Investigate any differences.

(vi)Compare estimates made in previous years with actual outcomes where known. Do the same for
the independent estimates of the auditors.

(vii)Review subsequent events.

 At the final review stage of the audit, the auditor should make a review of the estimates and
assess them in the light of:
(a) his knowledge of the business
(b) consistency with other evidence obtained during the audit.
 If the auditor considers that a material estimate is unreasonable, he should ask the directors
to adjust the financial statements, and if this is not done , then he should consider there is a
misstatement and ponder the implications for his auditor’s report.