Current Liabilities

Study Guide

I. Accounts Payable (or Vouchers Payable)—Primarily use substantive tests of ending balances.

A. Recall the difference between accounts payable and vouchers payable systems

described in the lessons in the "Internal Control—Transaction Cycles" section:

1. Accounts payable—In an accounts payable system, the payables are tracked by

the name of the vendor. The total payable to another party, which constitutes a
receivable to them, is susceptible to confirmation if desired.

2. Vouchers payable—In a vouchers payable system, the payables are tracked by

individual transaction without summarizing the amounts owed by vendor name.
The total payable to another party is not susceptible to confirmation, only
individual transactions could be confirmed.

B. Recall the four assertions that AICPA Professional Standards identify for account
balances at the end of the period: (1) existence; (2) completeness; (3) rights and
obligations; and (4) valuation and allocation.

C. Related to the Completeness Assertion (for liabilities, the auditor's primary concern

involves completeness not existence!)—Perform a search for unrecorded liabilities. This
is done toward the end of fieldwork to provide the best chance of detecting any
significant unrecorded liabilities.

1. Review cash disbursements subsequent to year-end and, for all disbursements

over some specified dollar amount (>$X), examine the related vendors’ invoices
and the entity's related receiving documents to identify transactions that should
have been reported as liabilities as of year-end; compare those apparent
liabilities to the details comprising the recorded payables to identify apparent
liabilities that are unrecorded.

2. Examine any unpaid invoices on hand at the date of the “search” along with the
entity's related receiving documents to identify any transactions that should
have been reported as a liability as of year-end.

3. Inquire of management about their knowledge of any unrecorded liabilities and

whether all invoices have been made available to the auditor. Document such
inquiries and management's response in the management representations
letter.

D. Related to the Existence and Valuation Assertions

 1. Verify the mathematical accuracy of payables by comparing the general ledger
balance to the supporting detailed listing of payables.

2. Vouch selected items to the underlying vendor's invoices.

3. Could confirm selected payables, but usually do not—Confirmation primarily

establishes the validity (existence) of the recorded items, but there is a
relatively low risk that the company would overstate its true liabilities; the far
bigger risk is that material liabilities may have been omitted (i.e., completeness).

4. Usually valuation is not a significant audit issue, since there is a presumption

that the client will pay 100% of what is owed; the auditor should look to see
that the client takes advantage of any available cash discounts for prompt
payment.

E. Related to the rights and obligations assertion—Inspect the specific terms of the

payables and inquire about any related party transactions. Separately classify notes
payable for borrowings from accounts payable for ordinary operating activities.

II. Other Current Liabilities—The auditor uses analytical procedures extensively to evaluate other
miscellaneous payables:

A. Wages and Salaries Payable—The auditor can compute the estimated accrual, in view
of the number of days to be accrued relative to a whole pay period.

B. Dividends Payable—The auditor can compute, in view of the declared dividends/share

(per the minutes of meetings of those charged with governance) times the number of
shares outstanding.

C. Interest Payable (and the Related Interest Expense)—The auditor can compute an
estimate of accrued interest for the time period involved, based on the interest rate
(and payment dates) specified in the underlying debt agreements.