Auditing 2

5/1/2-19 Chapter 08 AUDIT OF LIABILITIES, CAPITAL TOPIC LIST Trade accounts payable and purchases Long-term liabilities Provisions and contingencies Capital and directors’ emoluments Banking Academy Banking Academy Reference • BPP Chapter 16 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014125804111000000 5/1/2-19 CHAPTER 08 PAYABLES AND ACCRUALS ü Trade accounts payables are liabilities to pay for goods or services received in a period that have been invoiced for by the suppliers ü A ccruals (Accrued expenses) generally represent liabilities to pay for goods or services received in a period, that have not yet been invoiced for by the suppliers Banking Academy CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables -  -  -  -  -  -  -  Completeness Existence Rights and Obligations Accuracy, valuation and allocation Cut-off Classification Presentation Banking Academy 5/1/2-19 CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN COMPLETENESS - Obtain a listing of trade accounts payables and agree the total to the general ledger by casting and cross-casting - Obtain selected suppliers' statements and reconcile these to the relevant suppliers' accounts - Examine files of unmatched purchase orders and supplier invoices for any unrecorded liabilities - Test for unrecorded liabilities by examining post year end transactions - Perform a confirmation of accounts payables for a sample Banking Academy CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN COMPLETENESS - Compare the current year balances for trade accounts payables and accruals with the previous year - Compare the amounts owed to a sample of individual suppliers in the trade accounts payables listing with amounts owed to these suppliers in the previous year - Compare the payables turnover and payables days to the previous year and industry data Banking Academy 5/1/2-19 CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN COMPLETENESS -  Reperform casts of payroll records to confirm completeness and accuracy -  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 and investigate them further by discussion with management -  Perform proof-in-total (analytical procedures) on payroll and compare to figure in draft financial statements to assess reasonableness Banking Academy CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN EXISTENCE -  Vouch selected amounts from the trade accounts payables listing and accruals listing to supporting documentation, such as purchase orders and suppliers' 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 with the previous year to confirm reasonableness, and also calculating payables‘ turnover and comparing with the previous year Banking Academy 5/1/2-19 CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN RIGHTS AND OBLIGATIONS -  Vouch a sample of balances to supporting documentation, such as purchase orders and suppliers' invoices, to obtain audit evidence regarding rights and obligations Banking Academy CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN ACCURACY, VALUATION AND ALLOCATION -  Trace selected samples from the trade accounts payables listing and accruals listing to the supporting documentation (purchase orders, minutes authorising expenditure, suppliers' invoices etc) -  Obtain selected suppliers' statements and reconcile these to the relevant suppliers' accounts -  For a sample of accruals, recalculate the amount of the accrual to ensure the amount accrued is correct -  Recalculate the mathematical accuracy of a sample of suppliers' invoices to confirm the amounts are correct Banking Academy 10 5/1/2-19 CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN ACCURACY, VALUATION AND ALLOCATION -  Compare the current year balances for trade accounts payables and accruals with the previous year -  Compare the amounts owed to a sample of individual suppliers in the trade accounts payables listing with amounts owed to these suppliers in the previous year -  Compare the payables turnover and payables days with the previous year and industry data Banking Academy CHAPTER 08 AUDIT PLAN 11 PAYABLES AND ACCRUALS ACCURACY, VALUATION AND ALLOCATION For salaries payable: -  Recast calculation of remuneration -  Reperform calculation of statutory deductions to confirm whether correct -  Recast calculation of other deductions -  Agree individual remuneration per payroll to personnel records, records of hours worked, salary agreements etc -  Confirm existence of employees on payroll by meeting them, attending wages payout, inspecting personnel and tax records, and confirmation from managers -  Agree benefits on payroll to supporting correspondence Banking Academy 12 5/1/2-19 CHAPTER 08 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN CUT-OFF -  For a sample of vouchers, compare the dates with the dates they were recorded in the ledger for application of correct cut-off -  Test transactions around the year end to determine whether amounts have been recognised in the correct financial period -  Perform analytical procedures on purchase returns, comparing the purchase returns as a percentage of sales or cost of sales to the previous year Banking Academy CHAPTER 08 13 PAYABLES AND ACCRUALS Auditors should be aware of the possibility of understatement of payables AUDIT PLAN CLASSIFICATION & PRESENTATION -  Review the trade accounts payables 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 -  Read the disclosure notes to ensure the information is accurate and properly presented at the appropriate amounts Banking Academy 14 5/1/2-19 CHAPTER 08 LONG-TERM LIABILITIES Long-Term Liabilities ü  Long-term obligations usually arise from major financial requirements, such as funding a start-up company, expanding an existing company… ü  Transactions involving long-term liabilities are relatively few in number but usually involve large dollar amounts Banking Academy CHAPTER 08 15 LONG-TERM LIABILITIES THE KEY FINANCIAL STATEMENT ASSERTIONS COMPLETENESS whether all long-term liabilities have been disclosed ACCURACY, VALUATION AND ALLOCATION whether interest payable has been calculated correctly and included in the right period PRESENTATION whether long-term loans are correctly disclosed Banking Academy 16 5/1/2-19 CHAPTER 08 LONG-TERM LIABILITIES AUDIT PROCEDURES - Obtain/prepare a schedule of loans; compare the balances to the general ledger - Agree opening balances to prior year and recast - Trace additions and repayments to cash book - Confirm repayment conforms to agreement - Verify borrowing limits per the articles are not exceeded - Obtain direct confirmation from lenders - Review board minutes and cash book to ensure that all loans have been included Banking Academy CHAPTER 08 17 PROVISIONS AND CONTINGENCIES -  A provision is a liability of uncertain timing or amount A liability is a present obligation arising from past events, resulting in an outflow of resources -  A contingent asset/liability is a possible asset/liability arising from past events whose existence will be confirmed only by the occurrence of one of more uncertain future events not wholly within the entity’s control, or (liability) a present obligation that arises from past events but is not probable that a transfer of economic benefits will be required, or the amount cannot be measured with reasonable certainty Banking Academy 18 5/1/2-19 CHAPTER 08 PROVISIONS AND CONTINGENCIES Recognition of provision: IAS 37 states that a provision should be recognized (which simply means 'included') as a liability in the financial statements when all three of the following conditions are met: - An entity has a present obligation (legal or constructive) as a result of a past event - It is probable (ie more than 50% likely) that a transfer of economic benefits will be required to settle the obligation -  A reliable estimate can be made of the obligation Banking Academy CHAPTER 08 19 PROVISIONS AND CONTINGENCIES Contingent liabilities: Ø  A possible obligation 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 entity's control; or Ø  A present obligation that arises from past events but is not recognised because: o  It is not probable that a transfer of economic benefits will be required to settle the obligation; or o  The amount of the obligation cannot be measured with sufficient reliability Contingent assets A possible asset that arises from past events and whose existence will be confirmed by the occurrence of one or more uncertain future events not wholly within the enterprise's control Banking Academy 20 10 5/1/2-19 CHAPTER 08 PROVISIONS AND CONTINGENCIES AUDIT PLAN -  Obtain details of all provisions which have been included in the accounts and all contingencies that have been disclosed -  Obtain a detailed analysis of all provisions showing opening balances, movements and closing balances -  Determine for each material provision whether the company has a present obligation as a result of past events by: –Review of correspondence relating to the item –Discussion with the directors Have they created a valid expectation in other parties that they will discharge the obligation? Banking Academy CHAPTER 08 21 PROVISIONS AND CONTINGENCIES AUDIT PLAN -  Determine for each material provision whether it is probable that a transfer of economic benefits will be required to settle the obligation by: – Checking whether any payments have been made in the post year end period in respect of the item by reviewing after-date cash – Review of correspondence with solicitors, banks, customers, insurance company and suppliers both pre and post year end – Sending a letter to the solicitor to obtain their views (where relevant) – Discussing the position of similar past provisions with the directors Were these provisions eventually settled? Banking Academy 22 11 5/1/2-19 CHAPTER 08 PROVISIONS AND CONTINGENCIES AUDIT PLAN -  Recalculate all provisions made -  Compare the amount provided with any post year end payments and with any amount paid in the past for similar items -  In the event that it is not possible to estimate the amount of the provision, check that a contingent liability is disclosed in the accounts -  Consider the nature of the client's business Would you expect to see any other provisions eg warranties? -  Consider the adequacy of disclosure of provisions, contingent assets and contingent liabilities in accordance with IAS 37 Banking Academy CHAPTER 08 23 CAPITAL & OTHER ISSUES SHARE EQUITY CAPITAL Ø Preference shares -  Preference shares are shares which confer certain preferential rights on their holder -  Classification of preference shares: •  Redeemable •  Irredeemable Ø  Ordinary shares -  Ordinary shares carry no right to a fixed dividend but are entitled to all profits left after payment of any preference dividend Ø  Share premium -  The amount at which the shares are issued may exceed their par value Banking Academy 24 12 5/1/2-19 CHAPTER 08 CAPITAL & OTHER ISSUES The main concern with share capital and reserves is that: THE COMPANY HAS COMPLIED WITH THE LAW SHARE EQUITY CAPITAL -  Agree the authorised share capital with the statutory documents governing the company's constitution -  Agree changes to authorised share capital with properly authorised resolutions Banking Academy CHAPTER 08 25 CAPITAL & OTHER ISSUES The main concern with share capital and reserves is that: THE COMPANY HAS COMPLIED WITH THE LAW ISSUE OF SHARES -  Verify any issue of share capital or other changes during the year with general and board minutes -  Ensure issue or change is within the terms of the constitution, and directors possess appropriate authority to issue shares -  Confirm that cash or other consideration has been received or receivable(s) is included as called-up share capital not paid Banking Academy 26 13 5/1/2-19 CHAPTER 08 CAPITAL & OTHER ISSUES The main concern with share capital and reserves is that: THE COMPANY HAS COMPLIED WITH THE LAW TRANSFER OF SHARES -  Verify transfers of shares by reference to: – Correspondence – Completed and stamped transfer forms – Cancelled share certificates – Minutes of directors' meeting -  Review the balances on shareholders' accounts in the register of members and the total list with the amount of issued share capital in the general ledger Banking Academy CHAPTER 08 27 CAPITAL & OTHER ISSUES The main concern with share capital and reserves is that: THE COMPANY HAS COMPLIED WITH THE LAW DIVIDENS -  Agree dividends paid and declared pre year end to authority in minute books and reperform calculation with total share capital issued to ascertain whether there are any outstanding or unclaimed dividends -  Agree dividend payments to documentary evidence -  Test that dividends not contravene distribution provisions by reviewing the legislation Banking Academy 28 14 5/1/2-19 CHAPTER 08 CAPITAL & OTHER ISSUES The main concern with share capital and reserves is that: THE COMPANY HAS COMPLIED WITH THE LAW RESERVES -  Agree movements on reserves to supporting authority -  Ensure that movements on reserves not violate the legislation and the company's constitution by reviewing the legislation -  Confirm that the company can distinguish distributable reserves from those that are non-distributable -  Ensure that appropriate disclosures of movements on reserves are made in the company's accounts by inspection of the financial statements Banking Academy 29 15