Auditing &

Investigations II

Audit of liabilities, Capital and

Reserves
Key issues

 Audit objectives

 Audits of Liabilities

 Audit of Capital

 Audit of Reserves
 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.
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.
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.
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.
Audit Procedures for selecting
Sample for Circularization
1. Significant suppliers with credit
balances.
2. Suppliers with debit balances.
3. Significant suppliers with “nil”
balances.
4. A variety of large, small and
medium balances selected
from the ledger.
5. Any accounts known to be in
dispute
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.
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
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?
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.
Audit Procedures over loans

The auditor should obtain

schedules of the loan(s):

reconciling opening
balances,
movements in the year
and closing balances.
Continued

 Theauditor should test the

reconciliation of opening
and closing balances,

 and agree balance sheet

figures and comparatives.
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.
 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.
 End

Thank you for

your attention