ACCOUNTS

PAYABLE AND
OTHER
LIABILITIES
PART 2
February 10, 2021
Other Liabilities
In addition to the accounts payable
previously considered, other items classified as
current liabilities include:

• Amounts withheld from employees’ pay.

• Sales taxes payable.

• Unclaimed wages.

• Customers’ deposits.

• Accrued liabilities.
 Amounts Withheld from Employees’ Pay
Income taxes withheld not remitted as of the
balance sheet date -to be verified by the auditors.
(include accrued employer payroll taxes)
 trace amounts withheld to the payroll summary
sheets
 test computations of taxes withheld and accrued
 determine if taxes have been paid accordingly
 review quarterly tax returns.

Payroll deductions also are often made for union

dues, charitable contributions, retirement plans,
insurance, savings bonds, and other purposes.
Auditors should also review the adequacy of the
withholding procedures and determine that payroll
deductions have been properly authorized and
accurately computed.
Sales Taxes Payable
These taxes do not represent an expense to
the business; the retailer merely acts as a
collecting agent. Until the amounts collected
from customers are remitted to the taxing
authority, they constitute current liabilities of
the business.
The auditors’ verification of this liability
includes:
 Review of the client’s periodic tax returns
 Verify computation of the tax rate used to
total taxable sales.
 Examine a number of sales invoices
 Trace debits to the liability account for
remittances to copies of the tax returns and
 Vouch to the paid checks.
Unclaimed Wages
A list of unpaid wages should be
prepared after each payroll distribution. The
payroll checks should not be left for more
than a few days in the payroll department.
Prompt deposit in a special bank account
provides much improved control.
The auditors will analyze the Unclaimed
Wages account for the purpose of
determining that
(1) the CREDITS represent all unclaimed
wages after each payroll distribution and
(2) the DEBITS represent only authorized
payments to employees, remittances to
the state under unclaimed property laws,
or transfers back to general cash funds
through approved procedures.
Customers’ Deposits
Many companies require that customers make
deposits on returnable containers. Public utilities and
common carriers also may require deposits to
guarantee payment of bills or to cover equipment on
loan to the customer.
The verification should include
 obtaining a list of the individual deposits
 comparison of the total with the general ledger
control account.
 Testing the reasonableness of accrued interest (in
interest-bearing deposits)
As a general rule, the auditors do not attempt to
confirm deposits by direct communication with
customers; however, this procedure is desirable if
the amounts involved are substantial or controls are
considered to be deficient.
Accrued Liabilities
 interest payable
 accrued property taxes
 accrued payrolls
 payroll taxes
 income taxes payable, and
 amounts accrued under service guarantees.
In evaluating the reasonableness of accounting
estimates, auditors use one or more of the following
three basic approaches:
1. Review and test management’s process of
developing the estimate.
2. Review subsequent events or transactions bearing
on the estimate.
3. Independently develop an estimate of the amount
to compare to management’s estimate.
Accrued Liabilities
Subjective (as well as objective) factors may make it difficult to establish control over accrued
liabilities. As a result, these estimates may be particularly susceptible to misstatement, especially in
circumstances in which management is under pressure to show increased earnings.
The basic auditing steps for accrued liabilities are:
1. Examine any contracts or other documents on hand that provide the basis for the accrual.
2. Appraise the accuracy of the detailed accounting records maintained for this category of liability.
3. Identify and evaluate the reasonableness of the assumptions made that underlie the computation of
the liability.
4. Test the computations made by the client in setting up the accrual.
5. Determine that accrued liabilities have been treated consistently at the beginning and end of the
period.
6. Consider the need for accrual of other accrued liabilities not presently considered (that is, test
completeness).
7. For significant estimates, perform a retrospective analysis of the prior year’s estimates for evidence
of management bias.
Accrued Property Taxes
 include an analysis showing all of the year’s property tax transactions
 verify tax payments by inspection of the property tax bills issued by LGU and related paid checks
 explain the variation if the tax accruals differ significantly from those of prior years
 verify an estimated tax has been accrued

Accrued
Payrolls
The present consideration of payrolls is limited to the procedures required for testing accrued
payrolls at the balance sheet date. The accuracy of the amount accrued may be significant in the
determination of total liabilities and also in the proper matching of costs and revenue.
The verification procedure consists principally of comparing the amounts accrued to the actual
payroll of the subsequent period and reviewing the method of allocation at the balance sheet date.
Payments made at the first payroll dates of the subsequent period are reviewed to determine that no
significant unrecorded payroll liability existed as of the balance sheet date.
 Pension Plan Accruals
Auditing procedures for the accrued liability for pension costs may begin with a review of the copy
of the pension plan in the auditors’ permanent file.
The auditors must determine that the client’s accrued pension liability is presented in accordance
with PAS 19®, “Employee Benefits” including consideration of service cost, interest cost, amortization
of transition and service costs, and gains and losses on pension plan assets
The auditors will obtain representations from an actuary and confirm the activity in the plan with the
trustee. In evaluating the evidence from the actuary, the auditors should comply with the requirement,
“Using the Work of a Specialist,” as discussed in Chapter 5.

Postemployment Benefits Other Than

Pensions
Under PAS 19®, “Employee Benefits,” companies must accrue, during the years that employees
perform services, the expected cost of providing health and similar retirement benefits to the employees,
their beneficiaries, and their dependents. Determining the amount of these liabilities is a very complex
procedure, because assumptions must be made about matters such as employee work lives and increases
in medical costs. Since actuaries and other specialists develop these assumptions, the auditors should
evaluate the assumptions and the specialists ’qualifications “Using the Work of a Specialist.”
Accrued Vacation (Holiday) Pay
This type of liability arises from two situations:
(1) An employee entitled by contract to a vacation during the past year may have been prevented from taking
it by an emergency work schedule, (or in last year’s case, COVID-19’s travel restrictions) and
(2) An employee may be entitled to a future vacation of which part of the cost must be accrued to achieve a
proper matching of costs and revenue. (leave credits entitlement)
The auditors’ verification may begin with a review of the permanent file copy of the employment contract
or agreement stipulating vacation terms. The computation of the accrual should then be verified both as to
arithmetical accuracy and for agreement with the terms of the company’s vacation policy.

Accrued Commissions and

Bonuses
Accrued commissions to sales representatives and bonuses payable to managerial personnel also require
verification. The essential step in this case is reference to the authority for the commission or bonus. The
basic contracts should be examined and traced to minutes of directors' meetings. If the bonus or commission
is based on the total volume of sales or some other objective measure, the auditors should verify the
computation of the accrual by applying the prescribed rate to the amount used as a base.
Product Warranty Liabilities
The costs of rendering such services should be recognized as expenses
in the year the product is sold rather than in a later year in which the
replacement is made or the repair service is performed. The company will
make an annual charge to expense and a credit to a liability account based on
the amount of the year’s sales and the estimated future service or replacement
cost. As repairs and replacements take place, the costs will be charged to the
liability account.
The auditors should:
 review the client’s annual provision (estimated future expenditures) and
 compute the percentage relationship (liability account and year’s sales)
 review the charges to the liability account month by month
The auditors also should be alert for changes in the client’s products or
repair costs that might affect the amount of the warranty liability. Current
income tax laws prohibit the deduction of provisions for warranty liabilities;
deductions are permitted only when actual expenditures are incurred.
Accordingly, the auditors should ascertain that the client is properly allocating
income taxes attributable to the nondeductible provisions.
 Income Taxes Payable
The auditors should analyze the Income Taxes Payable account and
vouch all amounts to income tax returns, paid checks, or other supporting
documents. The final balance in the Income Taxes Payable account will
ordinarily equal the computed federal, state, and foreign taxes on the current
year’s income tax returns, less any payments thereon.
The tax expected to be paid by a corporation often differs from the
actual tax paid due to temporary differences between taxable income and
pretax accounting income. These differences result in the need to establish
deferred tax liabilities or assets. The auditors determine the amount of
deferred tax liabilities using schedules referred to as “tax accrual” working
papers, which usually are reviewed by one of the CPA firm’s tax specialists.
The auditors should determine the date on which income tax returns
for prior years were examined by BIR agents, as well as the particulars of
any disputes or additional assessments. Review of the reports of revenue
agents is also an essential step. In the first audit of a new client, the auditors
should review any prior years' income tax returns not yet examined by
revenue agents to make sure that there has been no substantial underpayment
of taxes that would warrant presentation as a liability.
Accrued Professional Fees
Fees of professional firms include charges for the services
of attorneys, public accountants, consulting engineers, and other
specialists who often render services of a continuing nature but
present bills only at infrequent intervals. By inquiry of officers
and by review of corporate minutes, the auditors may learn of
professional services received for which no liability has yet
been reflected in the accounts. Review of the expense account
for legal fees is always essential because it may reveal damage
suits, tax disputes, or other litigation warranting disclosure in
the financial statements.
Balance Sheet Presentation
CURRENT LIABILITY NON-CURRENT LIABILITY
ACCRUED EXPENSES Interest, Taxes, Rent, Wages
Income Taxes Deferred Income Tax Liability (or Deferred Income Tax Liability (or
asset) – for subsequent period asset)
Deferred Credits Rent, Interest collected in advance – Rent, Interest collected in advance
for subsequent period
Deposits Customer deposits

Time of Examination
Many auditors believe that most of the audit work on accounts payable should be performed after the balance
sheet date. This search for unrecorded liabilities is concentrated on the transactions occurring during the first few
weeks of the new year.
Some current liability accounts other than accounts payable are more suitable for preliminary audit work.
 Accrued property taxes (discounts are given to those who pay RPT (for subsequent period) in advance)
 Amounts withheld from employees’ pay (government mandated contributions)
 Amounts withheld and remitted to tax authorities for the year (1702 Q)
THANK YOU!