AUDIT PROGRAM ACCRUED LIABILITIES AND OTHER PAYABLES

OVERVIEW

Test Comparative Summary Obtain or prepare a comparative summary (1). Test balances for reasonableness, fluctuations and omissions (2).

Test Account Detail Obtain or prepare a detailed analysis (3). Perform detailed tests of the ending account balances (4). Test completeness of accrued liabilities and other payables (5).

Additional Procedures Obtain information for disclosure (6).

OVERVIEW-ACCRUED LIABILITIES AND OTHER PAYABLES

GUIDANCE

Accrued liabilities and other payables are considered to include those current liabilities (other than income taxes) not covered by substantive tests for trade accounts payable or for notes payable and long-term debt. Accrued liabilities include rent, payroll, taxes, professional fees, etc. When designing the audit program the auditor should consider the nature of the account balance and the risks associated with transactions flowing through it. As with other liability accounts the auditor's primary concern should be with the completeness objective.

When preparing this program the auditor should consider and design audit procedures that address relevant presentation and disclosure requirements. AUDIT PROGRAM ACCRUED LIABILITIES AND OTHER PAYABLES

Test Comparative Summary

OBTAIN OR PREPARE A COMPARATIVE SUMMARY (1).

1. Obtain or prepare a comparative summary of accrued liabilities and other payables balances (this summary may be incorporated into the analysis in step 2). Trace individual balances to the general ledger and previous audit's working papers.

Done by Date ..../../..

TEST BALANCES FOR REASONABLENESS, FLUCTUATIONS AND OMISSIONS (2).

2. Review the balances for reasonableness, expected or unexpected fluctuations between periods and obvious omissions.

Done by Date ..../../..

Test Account Detail

OBTAIN OR PREPARE A DETAILED ANALYSIS (3).

3. Obtain or prepare an analysis of the detail of accrued liabilities and other payables account balances at period-end. Note: Detail should include a description of items and related account balances.

Trace the ending balance to the comparative summary obtained in step 1 or to the general ledger and previous audit's working papers.

Done by Date ..../../..

GUIDANCE:

The auditor should be particularly responsive to accounts involving management's judgments and estimates; for example, judgments and estimates related to uninsured losses and other such future liabilities.

The assessment of the control environment should be considered, particularly those aspects dealing with management's judgments and financial statement integrity.

PERFORM DETAILED TESTS OF THE ENDING ACCOUNT BALANCES (4).

4. By examination of documentation (e.g., payroll records, agreements, contracts, invoices, other authorizations), recomputation, or the application of analytical procedures, test calculation of balance at end of period.

Done by Date ..../../..

GUIDANCE:

ACCRUED LIABILITIES AND OTHER PAYABLES-1

The auditor normally examines documentation to test the existence of accrued liabilities and other payables and to understand the nature and purpose of the accounts. For some accounts it is necessary to further test by recomputation that amounts have been allocated to the proper period or to establish their reasonableness by performing analytical procedures.

For example, the auditor may:

a. Compare real estate tax notices with properties held.

b. Examine payroll records, payroll tax filings and subsequent cash payments; recompute accrued payroll amounts to determine allocation to the proper period; and review the reasonableness of relationships among the payroll accounts when testing accrued payroll and payroll taxes payable.

c. Review warranty agreements and prior experience and perform analytical procedures, such as applying formulas or percentages from prior periods to current-period revenues from products subject to warranties, to determine the reasonableness of warranty accruals.

In judging the reasonableness of accrued liabilities and other payables the auditor should consider the nature of the division's business and industry and take account of unusual conditions.

This step requires a decision on the extent of tests. The auditor should use judgment in determining levels of tests after considering information gathered or updated about the division, including the reliability of the division's accounting procedures, the type and frequency of errors in prior periods and the nature and materiality of the account balance.

TEST COMPLETENESS OF ACCRUED LIABILITIES AND OTHER PAYABLES (5).

5. Ascertain the completeness of accrued liabilities and other payables by considering knowledge of the division's business and prior periods' audit results, analyzing relationships of account balances to other related accounts (e.g., payroll, real estate taxes, commissions, professional fees, fixed assets), considering evidence from other tests (e.g., search for unrecorded liabilities), and considering liabilities arising out of noncompliance with appropriate regulations.

Accounts Payable and Other Liabilities

This chapter explained the fundamental controls over accounts payable and purchase transactions. It also discussed the auditors' consideration of these controls and the substantive procedures for accounts payable and purchases. To summarize: Accounts payable are short-term obligations arising from the purchase of goods and services in the ordinary course of the business. The purchases cycle includes initiating and authorizing purchases, ordering goods and services, and recording and paying accounts payable. Effective internal control over purchase transactions is best achieved by having separate departments responsible for purchasing, receiving, and accounting for the transactions. In this manner, payments are made only for those purchases that are properly authorized and received. The auditors' principal objectives for the substantive tests of accounts payable and purchases are to: (a) substantiate the existence of recorded accounts payable and the occurrence of purchase transactions, (b) establish the completeness of accounts payable and purchase transactions, (c) determine that the client has obligations to pay the recorded accounts payable, (d) determine the appropriate valuation of accounts payable, and (e) determine that the presentation and disclosure of accounts payable and purchases are appropriate. In auditing accounts payable and other liabilities, it is important for the auditors to remember that an understatement of liabilities will exaggerate the financial strength of a company in the same way as an overstatement of assets. Therefore, the auditors' substantive procedures primarily focus on the objective of determining the completeness of recorded amounts. A number of these procedures involve inspecting documents related to transactions occurring during the subsequent period to determine whether these items should have been recorded as liabilities at year-end. Accrued liabilities represent obligations payable for services received before the balance sheet date that will be paid in the subsequent period. Examples include accrued warranty liabilities, accrued payroll, and accrued pension liabilities. The substantive procedures to audit these liabilities generally include inspection of documents, recomputation, and analytical procedures.