AUDIT OF

LIABILITIES
BY PROF. ANITA B.
CATOLICO
AUDIT OBJECTIVES
1. Determine that payables exist.
2. All transactions are properly recorded.
3. Payables represent valid and legal claims of 3rd
parties from the client.
4. Recorded at proper amount.
5. Presented and disclosed according to PAS/PFRS.
AUDIT PROCEDURES
1. Obtain from client a listing of accounts and notes
payable. Vouch to vendors’ statements.
2. Confirm recorded liabilities directly with
suppliers/creditors. Examine bank confirmations
for loans.
3. Perform purchases cut-off examination.
4. Test for unrecorded liabilities.
5. Perform analytical procedures.
6. Review documentation in client’s files.
7. Examine subsequent payments to creditors.
8. Vouch accounts payable schedule.
9. Test computation of accrued or prepaid interest.
10. Scan list of payables to determine that each type
of obligation is properly described and classified.
Determine that contingent liabilities are properly
disclosed.
11. Obtain from client a letter of representation
concerning liabilities.
Audit of Other Current Liabilities
1. Withholding taxes payable
2. Value added tax payable
3. Unclaimed salaries and wages
4. Customers’ deposits
5. Liabilities under trust receipts
6. Accrued expenses payable
7. Income tax payable
Audit of Long-Term Liabilities
1. Obtain analyses of long-term debt accounts and
related interest, premium and discount accounts.
2. Review debt agreements and confirm with
payees or appropriate 3rd party the principal,
interest rates, maturity date, etc.
3. Inspect bonds redeemed, retired or surrendered
during the period.
4. Trace authorization for issuance of debt to credits
to the long-term debt account. Review minutes of
board of directors’ meetings.
5. Vouch borrowing and repayment transactions to
supporting documents and review transactions
occurring near year-end.
6. Review payments of principals and renewals after
the SFP date.
7. Recalculate interest expense and amortization of
premium or discount.
8. Ascertain the amount of long-term debt maturing
within one year requiring current assets.
9. Evaluate FS presentation and adequacy of
disclosure.
 BTS Co. records its purchases at gross amounts but
wishes to change to recording purchases net of purchase
discounts. Discounts on purchases recorded from January
1, 2021 to December 31, 2021, totaled P80,000. Of this
amount, P8,000 is still available in the accounts payable
balance. The balances in BTS’s accounts as of and for the
year ended December 31, 2021, before conversion are:
 Purchases P 4,000,000
 Purchase discounts 32,000
 Accounts payable 1,200,000
1. The amount of purchase discounts lost to be recognized is
A. P8,000
B. P0
C. P32,000
D. P40,000
2. The accounts payable balance should be reduced by
E. P8,000
F. P 80,000
G. P32,000
H. P40,000
3. The purchases account should be reduced by
A. P32,000
B. P 80,000
C. P40,000
D. P8,000 
4. The entry to record the conversion is
A. Accounts payable 80,000
 Purchases 80,000
B. Purchase discounts lost 32,000
 Purchases 32,000
C. Purchase discounts lost 40,000
 Purchase discounts 32,000
 Accounts payable 8,000
 Purchases 80,000
D. Purchase discounts lost 32,000
 Accounts payable 8,000
 Purchases 40,000
Accounting for Warranties and Premiums
 Twice Co. carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote the sale of its
products, Twice uses two promotion techniques – premiums and warranties.
 
 PREMIUMS
 The premium is offered on the recorded and sheet music. Customers receive
a coupon for each P10 spent on recorded music and sheet music. Customers
my exchange 200 coupons and P200 for a CD player. Twice pays P340 for
each CD player and estimates that 60% of the coupons given to customers
will be redeemed. A total of 6,500 CD players used in the premium program
were purchased during the year and there were 1,200,000 coupons redeemed
in 2021.
 
 WARRANTIES
 Musical instruments and sound reproduction equipment are sold with
a one-year warranty for replacement of parts and labor. The estimated
warranty cost, based on past experience, is 2% of sales. Replacement
parts and labor for warranty work totaled P1,640,000 during 2021.

 Twice uses the accrual method to account for the warranty and
premium costs for financial reporting purposes. Twice’s sales for
2021 totaled P72,000,000 – P54,000,000 from musical instruments
and sound reproduction equipment and P18,000,000 from recorded
music and sheet music.
 The balances in the accounts related warranties and
premiums on January 1, 2021, were as shown below:
 
 Inventory of premium CD players P399,500
 Estimated premium claims outstanding 448,000
 Estimated liability from warranties 1,360,000
  
 Based on the preceding information, determine the amounts that will be
shown on the 2021 financial statements for the following:
1. Warranty expense
A. P1,640,000
B. P1,080,000
C. P800,000
D. P360,000
2. Estimated liability from warranties
A. P1,920,000
B. P1,080,000
C. P 240,000
D. P800,000
3. Premium expense
 P1,836,000
 P840,000
 P756,000
 P2,189,500
 

4. Inventory of premium CD players

 P399,500
 P569,500
 P2,210,000
 P739,500
 

5. Estimated premium claims outstanding

 P364,000
 P840,000
 P756,000
 P672,000
Bond Redemption Prior to Maturity
Date
 The long-term debt of Leni Co. as of Dec. 31,
2020 included 9% bonds payable of P400,000, less
unamortized discount of P32,000. Further
examination revealed that these bonds were issued
to yield 10%. The amortization of the bond
discount was recorded using the effective interest
method. Interest was paid on January 1 and July 1
of each year. On July 1, 2021 Leni retired the
bonds at 105 before maturity.
 What is the amount of loss to be recognized on the
retirement of bonds?
A. 52,400
B. 20,000
C. 51,600
D. 0