Auditing Other Current Liabilities – Risk, Assertions, And Procedures

Overview:

Other Current Liabilities refer to a type of liabilities that will be due and payable by the entity within one accounting period, i.e., usually in less than 12 months. And it is report inly in the balance sheet in the current liability section. This is in contrast with Other Current Assets, which we discussed here.

They are called “Other Current Liabilities” because they usually represent a very small or insignificant percentage of the total liabilities. These liabilities are so insignificant that they will not be listed out as line items on their own. Instead, they are categorized into “Other Current Liabilities” and presented together in the balance sheet.

Here are some examples of Other Current Liabilities:

  • Dividend payable
  • Bonds payable
  • Accrued bonus or payroll expenses
  • Retention sums payable
  • Provisions

However, if the number of these items increases further, then it will be listed out from the other liabilities to its accounting item.

Now let discuss the risk related to other current liabilities,

Risks:

Before we can determine what procedures to perform on Other Current Liabilities, we need first to identify the risks associated with it:

  • Risk of Material Misstatement: Other Current Liabilities may sometimes require judgment by the management, specifically in computing provisions. The management’s experience or that of the experts involved by the management to perform the valuation would greatly affect the risk of auditing this account.
  • Control Risk: Control Risk includes failure to recognize an Other Current Liability, no authorization or supporting documents to corroborate the recognition of such liabilities, recognition of Other Current Liability is not based on internal policy or the applicable accounting standards, etc. An example of a Control Risk is no provision recognized for the restoration cost of the office rented by the entity.
  • Detection Risk: Detection Risk is basically the risk that the auditor may not be able to detect the material misstatements in the reported amounts of Other Current Liabilities. Since Other Current Liabilities are normally of low value, there is a risk that they might not be selected by the auditor to perform testing.
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Assertions:

For an auditor to be reasonably assured of the Other Current Liabilities balance, tests will be performed to cover the relevant audit assertions. The assertions applicable to Other Current Liabilities are as follows:

  • Completeness: All Other Current Liability transactions during the accounting period have been properly recorded in the financial statements. Pay attention to the risk of underrecording of Other current liabilities which is normally link to other expenses.
  • Valuation: The value of the Other Current Liabilities and their net present values are properly evaluated.
  • Presentation and Disclosure: The Other Current Liability balance is correctly presented on the balance sheet and adequate disclosures on accounting policy have been made in the notes to the financial statements.

Note:

Existence is not usually an assertion for liabilities as most entities have the tendency to understate liabilities instead of overstating them.

Procedures:

Audit Procedures for testing Other Current Liabilities include Test of Controls and Substantive Tests.

Test of Controls:

Because Other Current Liabilities are not a usual item on the balance sheet and their value is usually small, not all entities have controls specific for these liabilities. However, we have shared some controls that can be tested below:

  • Segregation of Duties: It is always important that segregation of duties exist. For example, the preparer of the bonus accrual should be different from the reviewer and the person with authority to pay out the bonus. This will ensure the bonus accrual made is properly checked before being recorded. Auditors should check if such a step exists in an entity being audited.
  • Policy on the declaration of dividend: The entity should have controls in place to ensure the declaration of dividend is in accordance with relevant company laws. A test should be performed by the auditor to ascertain that such controls have taken place before an entity declare a dividend. For example, the entity will need to have sufficient retained earnings and cash to pay its liabilities in the next 12 months before dividends can be declared.
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Auditors will usually perform a walkthrough first to obtain an understanding of how the control is carried out before doing the Test of Controls. It is only after this step that auditors can decide which controls should be tested.

Samples will then be selected to test the controls. If no exception is noted, the controls will be deemed effective and reliable. This can, in turn, reduce the number of substantive audit procedures required.

Substantive Audit Procedures for Other Current Liabilities:

Substantive Audit Procedures for Other Current Liabilities consist of the following components:

1) Substantive Analytical Procedures:

Substantive Analytical Procedures are procedures that utilize both financial and non-financial data to determine if the balance of the Other Current Liabilities is reasonable.

For instance, the entity has informed the auditor that it has rented an office of which it has renovated to fit its own needs.

When going through the tenancy agreement, the auditor should be wary of any clause that may require the entity to restore the office to its original condition.

If there is such a clause, the auditor should expect to see a provision for restoration cost in the balance sheet.

Another instance will be when the auditor identified a board minute that approved the declaration of dividend to the shareholders, which will be paid in 2 months after the end of the accounting period. This should alert the auditor to anticipate a dividend payable within the balance sheet.

2) Test of Details for Other Current Liabilities:

To test details for Other Current Liabilities, audit procedures are designed around assertions. Example and description of test of details are given in the table below:

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Audit AssertionExample of Audit Procedure
CompletenessSelecting a sample of payments and invoices after the end of the accounting period to perform a search for unrecorded liabilities.
ValuationTesting the net present value or market value of the samples selected is appropriate and in line with the entity’s accounting policies. Take note of the discount rates used by the entity and ensure the rate used is reasonable.   Vouching to relevant supporting documents such as invoices, contracts, or agreements for samples selected.
Presentation and DisclosureReviewing the financial statements prepared by the entity and identifying if information regarding Other Current Liabilities has been sufficiently disclosed.