1. Auditing & Investigations II
Audit of liabilities, Capital and Reserves

2. Audit objectives Audits of Liabilities Audit of Capital
Key issues
Audit objectives
Audits of Liabilities
Audit of Capital
Audit of Reserves

3. 1. Introduction
In the audit of Financial statement, the auditor need to be satisfied that:
All payables are quantified and included in the financial statement
All payables are properly disclosed
All contingencies and commitments are identified and disclosed.

4. Internal Controls over Payables
Segregation of duties between:
Those who authorise assumption of a payable or obligation
Those who record payables
Those instrumental in discharging the liability
Sound accounting procedures
Ensuring all payables are accounted for.

5. Audit of Payables Trade Payable Key Audit approaches:
The use of circularisation procedures for the verification of payable balances.
The use of suppliers’ statements for validation of balances and cut-off arrangements.

6. Key Issues to consider in Circularization
The following tend to make up difference during circularization:
Cash in transit.
Goods in transit.
Unilateral adjustments e.g., discounts claimed by one party and disallowed by the other.

7. Audit Procedures for selecting Sample for Circularization
Significant suppliers with credit balances.
Suppliers with debit balances.
Significant suppliers with “nil” balances.
A variety of large, small and medium balances selected from the ledger.
Any accounts known to be in dispute

8. Substantive Test
Examining a sample of balances from the payables ledger with an “aged” list, noting the composition of the balance and whether it has been settled after the ledger date.
Checking casts of the payables schedule.
Agreeing the payables schedule to the control account.

9. Continued
Tracing accruals to the nominal ledger from the accruals schedule.
Reviewing debit balances to establish cause. Are they due to late invoices? Are they prepayments?
“Grossing up” payables balances by eliminating debit balances.
Performing a suppliers’ statement reconciliation

10. Analytical Procedures
Key ratios (gross profit/sales, current assets/current liabilities, quick assets/current liabilities, inventory turnover, purchases/cost of sales).
Comparatives for the above from previous years.
Budgetary estimates for purchases, inventories, payables, cash balances.
Interim management accounts – do they reveal similar trends as evidenced by key ratios on the accounts under review?

11. Audit of Long term Payable
Secured Loans
The auditor must examine loan agreements noting the following points.
The term of the loan.
The rate of interest (fixed or variable).
The security given.
Repayment terms.

12. Audit Procedures over loans
The auditor should obtain schedules of the loan(s):
reconciling opening balances,
movements in the year and closing balances.

13. Continued
The auditor should test the reconciliation of opening and closing balances,
and agree balance sheet figures and comparatives.

14. Continued
The auditor should scrutinise the statutory books and satisfy himself that they are correct in respect of:
charges on assets.
directors’ interests in loans.
The interest charge and interest accrual calculations must be checked.

15. Continued
The disclosure of loans in the accounts should give details as follows.
Relevant amounts are disclosed under liabilities falling due within or after one year as appropriate.
Convertible loans are shown separately from non-convertible loans.

16. Thank you for your attention
End
Thank you for your attention