Ridham Enterprises, a trading firm, has shown a substantial amount under “Trade Payables and Other Current Liabilities" in its financial statements…

Audit procedures - To establish the existence of trade payables and other current liabilities as at the period- end (i) Check whether there are controls in place to ensure that any purchase/ expense invoice does not get recorded more than once and payable balances are automatically recorded in the general ledger at the time of recording of expense. (ii) Obtain accounts payable ageing report and trace its balances to the general ledger. If there are any differences, investigate reconciling items. Journal entries, specially for large amounts should be carefully examined. (iii) An important audit activity is to contact vendors directly/independently and ask them to confirm the amounts of accounts payable as at the end of the reporting period under audit. This should necessarily be done for all significant account payable balances as at the period end and for parties from whom material purchases have been made during the period under audit even if period-end balance of such parties is not significant. (iv) If there are any related party payables, review whether they were properly authorised and the value of such transactions were reasonable and at arm’s length. (v) Review a trend line of purchases/ expenses and accounts payable, or a comparison of the two over time, to see if there are any unusual trends. Make inquiries about reasons for changes in trends from the management. Verification of liabilities is as important as that of assets because omission, understatement, or overstatement of liabilities would result in the financial statements not showing a true and fair view of the entity’s state of affairs.