THE CURRENT LIABILITIES VERIFICATION: Audit procedures:

1 Request schedule of long and short-term liability from the client.

1 Cut-off procedures are carried out properly: to ensure all trade payable should not included unless the goods were acquired before the year end.

1 Reasonableness: consider the reasonableness of the liability 1 Internal control procedures: to evaluate and test internal

control procedures.

1 Authority: both current and non current liabilities should be properly authorised by directors.

1 Presentation and disclosures: Both current and non current liabilities should be disclosed properly in the balance sheet. 1 Documentation: The auditor must examine all relevant

documents; these include invoices, correspondence, and debentures deed.

1 Security: some liabilities are secured in various ways, usually by fixed or floating charges.

1 Vouching: the creation of each liability should be vouched, for example the receipt of a loan.

1 Accounting policy: the auditor must satisfy himself that appropriated accounting policies have been adopted and applied consistently.

1

2

3 External verification: with many liabilities it is possible to verify the liability directly with the trade payables. This action will be taken with short term loan, bank overdraft and by a similar technique that used with trade receivables (circularisation).

1 Review post balance sheet events (payment made to suppliers after the balance sheet date) IAS 10 Events after balance Sheet Date.

Provisions:

IAS 37 Provisions, Contingent Liabilities and Contingent Assets Provision: A liability of uncertain timing or amount

Liability:

• Present obligation as a result of past events

• Settlement is expected to result in an outflow of resources (payment)

Contingent liability:

• A possible obligation depending on whether some uncertain future event occurs, or

•

• A present obligation but payment is not probable or the amount cannot be measured reliably

Contingent Asset

A possible asset that arises from past events, and

Whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise.

An enterprise must recognise a provision if:-

• A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),

• Payment is probable ('more likely than not'), and

• The amount can be estimated reliably

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

In reaching its best estimate, the company should take into account the risks and uncertainties that surround the underlying events. Expected cash outflows should be discounted to their present values, where the effect of the time value of money is material. In measuring a provision consider future events as follows:

• Forecast reasonable changes in applying existing technology

• Ignore possible gains on sale of assets

• Consider changes in legislation only if virtually certain to be enacted

Restructuring by sale of

an operation Accrue a provision only after a binding sale agreement Restructuring by closure

or reorganisation Accrue a provision only after a detailed formal plan is adopted and announced publicly. A Board decision is not enough

Warranty Accrue a provision (past event was the sale of defective goods)

Land contamination Accrue a provision if the company's policy is to clean up even if there is no legal requirement to do so (past event is the obligation and public expectation created by the company's policy)

Customer refunds Accrue if the established policy is to give refunds (past event is the customer's expectation, at time of purchase, that a refund would be available)

Offshore oil rig must be removed and sea bed restored

Accrue a provision when installed, and add to the cost of the asset

Abandoned leasehold,

four years to run Accrue a provision CPA firm must staff

training for recent changes in tax law

No provision (there is no obligation to provide the training)

A chain of retail stores is

self-insured for fire loss No provision until a an actual fire (no past event) Self-insured restaurant,

people were poisoned, lawsuits are expected but none have been filed yet

Accrue a provision (the past event is the injury to customers)

Major overhaul or repairs No provision (no obligation) Onerous (loss-making)

contract

Accrue a provision

Disclosures

Reconciliation for each class of provision: Opening balance

Additions

• Used (amounts charged against the provision)

•

• Released (reversed)

• •

• Closing balance

For each class of provision, a brief description of: Nature

Timing

Uncertainties Assumptions Reimbursement

Audit Tests:- 1

2 Any amount retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred or certain to be incurred but uncertain as to amount or as to the date on which it will arise.

1 The provision is debit balance and the effect on profit or loss. 1 Is for likely or certain future payment.

1 Where the amount or the date of payment is uncertain

1 Review post balance sheet event (outcome after the balance sheet date)

Contingences: Pending legal actions

1

2 Review the client’s records for recording of the claims and disputes and the procedures for bringing these to the attention of the board

1 Review the correspondences with the solicitors

1 Discuss with management regarding possible outcome of claims (Obtain letter of representation).

1 Examine solicitor’s fees note against bank payment recording in the client’s books and records.

1 Obtain written assurances from directors with an estimate of the possible ultimate liabilities

1 Check the disclosure in the balance sheet.

2 Debentures: Audit of debentures:

1

2 Obtain a schedule detailing the debentures due at the beginning of the year, addition and redemption during the year and final debentures at year ended.

1 Obtain copies of debentures certificates and verify the details and filed in permanent file.

2

3 Check the opening balances from previous years working papers file.

1 Obtain copy of director’s minutes for any approvals for addition to debentures.

1 Vouch repayments with debentures certificates, cash book to check the correct amount is paid.

1 Vouch interest payments with debentures certificates, cash book to check the correct interest is paid.

1 Agree total amount outstanding with register of debenture holders.

1 If loan is secured, verify charge is registered with relevant regulatory authority.

1 Check the disclosure requirements.

Audit of share capital:

Audit Procedures:

1 Ensure the issue within limit of Memorandum and articles of the companies

1 Ensure the issue is subject to directors minute

1 Verify the internal control procedures/Custody of unused certificate.

1 Ensure and verify the shareholder details 1 Ensure the cash receipts for the share issue

1 Review the counter-foils for the share certificates for sequence of issues

1 Vouch the payment of underwriting and other fees 2

3 Determine the total of shares of each class as stated in the balance sheet and obtain a list of shareholding, which in total should agree with the balance sheet total.

Other relevant standards:

IAS 8 : ACCOUNTING POLICIES, CHANGES IN ACCOUNTING