AUDIT PROGRAM ACCRUED LIABILITIES AND OTHER PAYABLES

OVERVIEW
Test Comparative Summary
Obtain or prepare a comparative summary (1).
Test balances for reasonableness, fluctuations and
omissions (2).
Test Account Detail
Obtain or prepare a detailed analysis (3).
Perform detailed tests of the ending account balances
(4).
Test completeness of accrued liabilities and other
payables (5).
Additional Procedures
Obtain information for disclosure (6).
OVERVIEW-ACCRUED LIABILITIES AND OTHER PAYABLES
GUIDANCE
Accrued liabilities and other payables are considered to include those
current liabilities (other than income taxes) not covered by substantive
tests for trade accounts payable or for notes payable and long-term debt.
Accrued liabilities include rent, payroll, taxes, professional fees,
etc. When designing the audit program the auditor should consider the
nature of the account balance and the risks associated with transactions
flowing through it. As with other liability accounts the auditor's primary
concern should be with the completeness objective.
When preparing this program the auditor should consider and design audit
procedures that address relevant presentation and disclosure
requirements.
AUDIT PROGRAM
ACCRUED LIABILITIES AND OTHER PAYABLES
Test Comparative Summary
OBTAIN OR PREPARE A COMPARATIVE SUMMARY (1).
1.

Obtain or prepare a comparative summary of accrued liabilities and

other payables balances (this summary may be incorporated into the
analysis in step 2). Trace individual balances to the general ledger
and previous audit's working papers.

Done by
Date
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TEST BALANCES FOR REASONABLENESS, FLUCTUATIONS AND

OMISSIONS (2).
2.

Review the balances for reasonableness, expected or unexpected

fluctuations between periods and obvious omissions.
Done by
Date
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Test Account Detail

OBTAIN OR PREPARE A DETAILED ANALYSIS (3).

3.

Obtain or prepare an analysis of the detail of accrued liabilities

and other payables account balances at period-end.
Note:

Detail should include a description of items and related

account balances.

Trace the ending balance to the comparative summary obtained in

step 1 or to the general ledger and previous audit's working papers.
Done by
Date
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GUIDANCE:
The auditor should be particularly responsive to accounts involving
management's judgments and estimates; for example, judgments and
estimates related to uninsured losses and other such future liabilities.
The assessment of the control environment should be considered,
particularly those aspects dealing with management's judgments and
financial statement integrity.
PERFORM DETAILED TESTS OF THE ENDING ACCOUNT BALANCES
(4).
4.

By examination of documentation (e.g., payroll records, agreements,

contracts, invoices, other authorizations), recomputation, or the
application of analytical procedures, test calculation of balance
at end of period.
Done by
Date
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GUIDANCE:
ACCRUED LIABILITIES AND OTHER PAYABLES-1
The auditor normally examines documentation to test the existence of
accrued liabilities and other payables and to understand the nature and

purpose of the accounts. For some accounts it is necessary to further

test by recomputation that amounts have been allocated to the proper
period or to establish their reasonableness by performing analytical
procedures.
For example, the auditor may:
a.

Compare real estate tax notices with properties held.

b.

Examine payroll records, payroll tax filings and subsequent cash

payments; recompute accrued payroll amounts to determine
allocation to the proper period; and review the reasonableness of
relationships among the payroll accounts when testing accrued
payroll and payroll taxes payable.

c.

Review warranty agreements and prior experience and perform

analytical procedures, such as applying formulas or percentages from
prior periods to current-period revenues from products subject to
warranties, to determine the reasonableness of warranty accruals.

In judging the reasonableness of accrued liabilities and other payables

the auditor should consider the nature of the division's business and
industry and take account of unusual conditions.
This step requires a decision on the extent of tests. The auditor should
use judgment in determining levels of tests after considering information
gathered or updated about the division, including the reliability of the
division's accounting procedures, the type and frequency of errors in
prior periods and the nature and materiality of the account balance.
TEST COMPLETENESS OF ACCRUED LIABILITIES AND OTHER
PAYABLES (5).
5.

Ascertain the completeness of accrued liabilities and other payables

by considering knowledge of the division's business and prior
periods' audit results, analyzing relationships of account balances
to other related accounts (e.g., payroll, real estate taxes,
commissions, professional fees, fixed assets), considering evidence
from other tests (e.g., search for unrecorded liabilities), and
considering liabilities arising out of noncompliance with appropriate
regulations.

Accounts Payable and Other Liabilities

This chapter explained the fundamental controls over accounts payable and purchase transactions. It
also discussed the auditors' consideration of these controls and the substantive procedures for
accounts payable and purchases. To summarize:

Accounts payable are short-term obligations arising from the purchase of goods and services
in the ordinary course of the business.

The purchases cycle includes initiating and authorizing purchases, ordering goods and
services, and recording and paying accounts payable. Effective internal control over purchase
transactions is best achieved by having separate departments responsible for purchasing,
receiving, and accounting for the transactions. In this manner, payments are made only for
those purchases that are properly authorized and received.

The auditors' principal objectives for the substantive tests of accounts payable and purchases
are to: (a) substantiate the existence of recorded accounts payable and the occurrence of
purchase transactions, (b) establish the completeness of accounts payable and purchase
transactions, (c) determine that the client has obligations to pay the recorded accounts
payable, (d) determine the appropriate valuation of accounts payable, and (e) determine that
the presentation and disclosure of accounts payable and purchases are appropriate.

In auditing accounts payable and other liabilities, it is important for the auditors to remember
that an understatement of liabilities will exaggerate the financial strength of a company in the
same way as an overstatement of assets. Therefore, the auditors' substantive procedures
primarily focus on the objective of determining the completeness of recorded amounts. A
number of these procedures involve inspecting documents related to transactions occurring
during the subsequent period to determine whether these items should have been recorded as
liabilities at year-end.

Accrued liabilities represent obligations payable for services received before the balance sheet
date that will be paid in the subsequent period. Examples include accrued warranty liabilities,
accrued payroll, and accrued pension liabilities. The substantive procedures to audit these
liabilities generally include inspection of documents, recomputation, and analytical procedures.