AUDITING Session 11 LONG TERM LIABILITY EQUITY Relatively

AUDITING Session 11

LONG TERM LIABILITY & EQUITY • Relatively few transactions affect the account balances, but each transaction is often highly material. (Bonds issue) • The exclusion or misstatement of a single transaction can be material • A legal relationship exists between the client entity and the holder of the stock, bond, or similar ownership document. • A direct relationship exists between the interest and dividends accounts and debt

CHARACTERISTICS • Auditors often set tolerable misstatement at a low level because it is usually possible to completely audit the account balance and transactions for Bonds • inherent risk is set at a low level because the correct account value is usually easy to determine. • Auditors are more concerned about the completeness objective for both the account balances and the disclosures (collateral and covenant restrictions) • The cycle usually contains few transactions

TRADE PAYABLES • Possibility of understatement of liabilities to improve liquidity and profits (by understating the corresponding purchases). • Ascertain whether liabilities existing at the year -end have been completely and accurately recorded. a) Is there a satisfactory cut-off between goods received and invoices received, so that purchases and trade accounts payable are recognised in the correct year? b) Do trade accounts payable represent the bona fide amounts due by the company?

CONFIRMATIONS • Confirmations are usually not sent because reliable, independent evidence in the form of suppliers‘ invoices and suppliers' statements is available. • Where an entity's internal controls are weak, or suppliers‘ statements may not be available it may be relevant to undertake confirmation procedures. • Where the auditor is concerned about the presence of unrecorded liabilities, regular suppliers with small or zero balances on

COMPLETENESS • Obtain a listing of trade accounts payables and agree the total to the GL. • Test for unrecorded liabilities by examining post year-end transactions. • Obtain suppliers' statements and compare with A/P. • Examine files of unmatched purchase orders and supplier invoices for any unrecorded liabilities. • Complete the disclosure checklist to ensure that all disclosures have been made. • Compare the current year balances for trade accounts payables and accruals to the

COMPLETENESS (2) • Compare the amounts owed to a sample of individual suppliers in the A/P listing with the previous year. • Compare the A/P turnover and A/P days to previous year. • Confirm payment of net pay per payroll records to cheque or bank transfer summary. • Agree net pay per cashbook to payroll. • Inspect payroll for unusual items. • Perform analytical procedures on payroll and compare to figure in draft financial statements to

EXISTENCE • Vouch selected amounts from the A/P listing and accruals listing to supporting documentation i. e. as PO and invoices. • Obtain selected suppliers' statements and reconcile these to the relevant suppliers' accounts. • Perform a confirmation of accounts payables for a sample. • Perform analytical procedures comparing current year balances to the previous year to confirm reasonableness, and also calculating payables‘ turnover and comparing to the

RIGHTS & OBLIGATIONS • Vouch a sample of balances to supporting documentation such as PO and suppliers' invoices • Trace sample A/P and accruals listing to the supporting documentation (PO, minutes authorising expenditure, suppliers' invoices etc). • For a sample of accruals, recalculate the amount of the accrual to ensure the amount accrued is correct. • Compare the A/ P and accruals to the P/Y balances. • Compare the amounts owed to a sample of

ACCURACY • Recalculate the mathematical accuracy of a sample of suppliers' invoices to confirm the amounts are correct. • Recast calculation of remuneration. • Re-perform calculation of statutory deductions to confirm whether correct. • Confirm validity of other deductions by agreeing to supporting documentation. • Recast calculation of other deductions

CLASSIFICATION & UNDERSTANDABILITY • Review the A/P listing to identify any large debits (which should be reclassified as receivables or deposits) or long-term liabilities which should be disclosed separately. • Read the disclosure notes relevant to liabilities in the draft financial statements and review for understandability