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VERIFICATION OF LIABILITIES

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The auditors duties with regard to liabilities can be summarised as:

  1. To verify the existence of liabilities shown in the balance sheet and that these are genuine obligations of the company.
  2. To verify the correctness/accuracy of the money amount of such liabilities.
  3. To verify the appropriateness of the description given in the accounts and the adequacy of the disclosure.
  4. To verify that all existing liabilities are actually included in the accounts. I.e. completeness

Number (4) poses the most difficulty to the auditor.

Inclusion of all liabilities

It is not enough for the auditor to be satisfied that all liabilities recorded in the books are correct and are incorporated in the final accounts he must also be satisfied that no other liabilities exist but which are not for various reasons in the books and in the accounts.

Examples of such liabilities include:

  • Contingent liabilities such as claims by ex-employees for unfair dismissal, pending law suits e.t.c.
  • Bonuses under profit sharing arrangements
  • Tax liabilities.
  • Claims under warranties and guarantees.
  • Bills receivable discounted.

The auditor must take steps to identify such liabilities. The procedures carried out would include:

  • Enquiry of the directors and other officers.
  • Examination of post balance sheet events, which includes inspection of purchase invoices and the cashbook etc.
  • Examination of minutes of meetings.
  • Review of previous years working papers.
  • Awareness of the possibilities at all times when conducting the audit e.g. discovering during the audit that the client deals in future will alert the auditor of the possibility of outstanding commitment.
  • Obtain a letter of representation from the client.

 



 

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