Question

A) What kind of internal control works for accrued liabilities?

B) What assertions could accrued liabilities have? And explain how to test them. How to test accrued liabilities.

Answer 1

(A) An accrued liability refers to an expense a business has incurred but has not yet paid. It can be Short term or long term based on company's obligations. It occurs in the balance sheet when Accrual basis of Accounting has been followed by the company. Internal Control for Accred Liabilities:

• Examine all the documents related to the transactions which occurres during the relevant period for determination of the occurance of liability, whether the items should actually been recorded as liabilities.
• Recompute balances for reasonableness, fluctuations & omissions and that amounts have been allocated to the proper period or to establish their reasonableness by performing analytical procedures.
• Analyzing relationships of account balances to other related accounts considering evidence from other tests and considering liabilities arising out of noncompliance with appropriate regulations.
• Compare the amount inccured in this nature with the amount incurred in the previous years to determine any major fluctuations that are inconsistent with other relevant information or deviate significantly with predicted amounts.

(B) Assertions related to Accrued Liabilities are:

• Occurance- that the transaction took place which pertains to entity.
• Authorization- that the transaction has been properly authorised.
• Accuracy- that the transaction entered is accurately entered.
• Cut-off- that the transaction pertains to the period.
• Classification- that the transaction have been appropriately classified under relevant head.

Accrued Liabilities can be tested using various substantive procedures such as:

• Test a sample of purchase requirement for proper approval.
• Recompute the mathematical accuracy of a sample of vendors' invoices.
• Compare dates on few vouchers with that of the dates of transactions were recorded. On sampling basis test check transactions near year-ending to check if they are recorded in the proper accounting period.
• Obtain listing of accrued liabilities and agree total to general ledger.
• Read footnotes and other information to ensure that the information is accurate and properly presented at the appropriate amounts.