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The principle objective of the verification of liabilities, commitments and contingencies is to form an opinion as to their completeness, existence, valuation and presentation in...

The principle objective of the verification of liabilities, commitments and contingencies is to form an opinion as to their completeness, existence, valuation and presentation in the financial statements.

Required:
a. Why does the auditor examine statements received from suppliers of goods and services?
b. How would the auditor ensure that at the year end all goods received by a client were included in both inventories and creditor balances?
c. How would the auditor ensure that the amounts accrued for wages and salaries due but unpaid were properly calculated and recorded in the books?
d. What tests would the auditor need to undertake in order to ensure that capital commitments at the year end were fairly stated in the books?

Answers

Peter
a) Examination of statements received from suppliers of goods and services:

• To ensure that all the liabilities are included for both services and goods
• To ensure that where a service or a good has been received before the year end the corresponding liability has been set up. This is called checking the cut-off.
• It also helps in establishing the reasonableness of the liability which may put him upon enquiry
• It also gives him the chance to compare the current liabilities with previous years liabilities
• He examines the statements to establish the terms and conditions when accepting a liability between the client and his creditor.
• The auditor also wants to ensure that the description in the accounts is adequate.
• This statements will show the materiality of the supplies which has to be taken into consideration.
• The auditor will examine the statements in order to match the physical goods to the statement.

Ensuring that all goods and received by a client were included in both inventories and credit balances:

• Checking they use pre-numbered goods received notes and if they match the goods received notes with suppliers statements and invoices.
• The use of pre-numbered purchase orders and their subsequent matching with goods received notes.
• The auditor should investigate the matched goods received notes.
• Regular reconciliation between the creditors ledger and the suppliers statements, having a list of approved suppliers.

Ensuring that the amounts accrued for wages and salaries due but unpaid were properly calculated and recorded in the books.

• Check if a proper independent record of employees is maintained so as to find out dummy employees on the payroll. Fictitious names may be invented or employees who have left or retired may be retained on the payroll. This is usually done by the wages officer.
• Improper calculation of pay can occur when there is collusion between employees and wages officer so this should be directed as well.
• Check if they cast the payroll at the time of approval.

Tests undertaken in order to ensure that capital commitments at the year end were fairly stated in the books.

• Check authorisation of capital commitments this should be prepared by very senior level management and those responsible should have no connection with cash or the custody of title.
• Maintenance of investment register; check if it is done by a clerk with no access to documents of title and responsibility for authorisation of purchase or sales .
• Ensure that an independent clerk should be given the duty of comparing contract notes with purchase and sales authorisation and for ensuring that charges have been correctly calculated.
• Adequate custody procedures must be maintained for documents of title and two senior officials should have responsibility for them.
Musyoxx answered the question on March 16, 2018 at 16:43

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