Auditing Current Liabilities

Recall of FAR topics and audit of liabilities

Liability

The present obligation of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources.

Obligating Event

An event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation.

Obligating Event

It is an event that creates a legal or constructive obligation.

Legal Obligation

It is established by contract (explicit or implicit), legislation, or similar means and is legally enforceable by the parties to whom they are owed.

Constructive Obligation

It arises from an entity’s customary practices, published policies, or specific statements if the entity has no practical ability.

Current Liability

It is expected to be settled within the entity’s normal operating cycle.

Current Liability

It is held for the purpose of trading.

Current Liability

It is due to be settled within 12 months.

Current Liability

For which, the entity does not have an unconditional right at the end of the reporting period to defer settlement beyond 12 months.

Breach of Contract and Grace Period

A liability is classified as current when this has become payable on demand because the entity has breached an undertaking under a long-term loan agreement on or before the reporting date.

Financial Liability

Any liability that is a contractual obligation to:

• deliver cash or another financial asset to another entity

• exchange financial assets or financial liabilities with another entity under conditions that are potential unfavorable to the entity

Accounts Payable

A company’s short-term obligations owed to its creditors or suppliers, which have not been paid.

Trade Accounts Payable

Liabilities arises from purchase of inventory on account.

Notes Payable

Obligations supported by Debtor Promissory Notes.

Nominal Interest Rate

It is the rate appearing on the face of an interest-bearing note.

Effective Interest Rate

It is the rate used in Present Value Computations (Interest Expense).

Accrued Expense

Expenses already incurred but not yet paid

Advances from Customers

Example of Unearned Income

Unearned Income

Advance payments made by customers for goods or services to be delivered in the future

Gift Certificate Sold

Example of Unearned Income

Employee Benefits

Wages, salaries and government contributions

Short Term Compensated Absences

Annual Paid Leave and Paid Sick Leave. Employee Benefit

Accumulating Compensated Absence

It is to recognize the expected cost of Short-Term Employee Benefits when employees render service that increases their entitlement to future compensated absences (Accrued Unused Absences)

Non-Accumulating Compensated Absences

It is to recognize expected cost of Short-Term Employee Benefits when the absences occur (Expense as Incurred)

Bonus Payable

It occurs when an entity is required to pay their employees after the fulfillment of certain terms and conditions. They are required to be recorded as current liabilities in the balance sheet.

Provision

A liability of uncertain amount or uncertain timing

Provision

There is a probable outflow of resources embodying economic benefits will be required to settle the obligation

Provision

A reliable estimate can be made of the amount of the obligation

Premium Liability

It is articles offered free or at a reduced price to make a combined offer more attractive to customers

Rebates Liability

It represents the amount of consideration that the company does not expect to be entitled to because it will be refunded to customers (Partial Refund)

Warranty Liabilities

The conditions under and period during which the producer or vendor will repair, replace, or compensate for the effectiveness of the item without cost to the buyer.

Derecognition of Financial Liabilities

A financial liability will be removed from the statement of financial position when it is extinguished (discharged, cancelled, expired)

Existence

All recorded liabilities on SFP are authentic or real debts due to creditors

Completeness

All the liabilities owed by the entity at the reporting date are included in the SFP

Valuation

All liabilities included in SFP are at the appropriate and correct amounts

Rights and Obligations

Liabilities reported in SFP represents obligations of the entity at the reporting date

Presentation and Disclosure

Liabilities and related amounts are properly classified, described and disclosed in FS, in accordance to PFRS.

Existence, Completeness, & Rights and Obligations

Performing purchase and accounts payable cut-off

Existence, Valuation and Allocation, & Rights and Obligations

Confirming Liabilities to debtors

Existence, & Valuation and Allocation

inspecting supporting documents such as contracts and invoices

Existence, Completeness, Valuation and Allocation, & Rights and Obligations

Performing analytical review procedures to liabilities and related accounts

Completeness, & Valuation and Allocation

Reconciling General and Subsidiary Ledger

Completeness & Rights and Obligations

Searching for unrecorded liabilities.

Valuation and Allocation

Testing the accuracy of interest expense, interest payable, amortization and discount and premium.

Valuation and Allocation

Evaluating valuation of liabilities denominated in foreign currencies.

Presentation and Disclosure

Reviewing compliance with terms of debt agreements

Presentation and Disclosure

Evaluating proper financial statement presentation and adequacy of disclosure