CHAPTER

16
SUBSTANTIVE TESTS
OF LIABILITIES
Learning Objectives
After studying this chapter, you should be able to:
 Describe the auditors' objectives for the substantive audit of liabilities.
 Describe the nature of the audit procedures to accomplish the auditors' objectives for the
audit of liabilities.
 Understand and prepare audit working papers to document audit procedures for
liabilities.

In examining liabilities, an auditor places primary emphasis on verifying not only on

what is recorded, but also on what is not recorded. The auditor seldom finds amounts
recorded as liabilities which are not liabilities, but unrecorded liabilities are not unusual.
In fact, they are inherent in an accounting process with periodic reporting thus, the year-
end procedure for payable is primarily a test for understatement, called a "search for
unrecorded liabilities"? Also, the audit procedures should provide evidence about the
reasonableness of liabilities which are already recorded and presented in the financial
statements.
AUDIT OF CURRENT LIABILITIES
A. Accounts and Notes Payable
A summary of the management's assertions, audit objectives and audit
procedures for the liability accounts are presented in Figure 16.1 as follows:
Figure 16.1 Substantive Testing of Liabilities
 Audit Objectives
Assertions Audit Objectives Audit Procedures


 Audit Procedures
 Existence of Occurrence
 A
 To determine payables an of the statement of financial position dato
 1. Orain om te sienta Isting of
 accounts and roles payable as olyesend and reconcile to the
 general ledger 2 Vouch recorded to
 veodor statements 3. Confirm recorded lable
 directly wth suppliers and croton Investigate oferences in abitis reported In be
confirmations with the
 recorded book amounta 4 Examine bank contrations for
 L
 Completeness
 B. To determine all transactions
 relating to payables have been propery recorded
 5. Perform purchases
 examinan 6. Test for unrecorded liabilities 7. Patform aracal procedures & In addition to audit
procedure
 no. 3.review documentation
 client's fios 9 Eamine subsequent paymes
 to cred
 AL Rights and
 Obligation
 C. To determine the payables