Verification of liabilities is necessary so as to form an opinion as to the truth and fairness of representation in the financial statements. Verification of liabilities is equally as important as the verification of assets. The Balance Sheet will not reveal a true and fair view of the slate of affairs of a company, if liabilities are not properly verified and valued.
Generally, the objective of verification of liabilities is to form an opinion which is as follows:
- Balance in the accounts of creditors reflects a true position as to the liabilities of the business;
- All liabilities of the business, including those not recorded in the books of account whether intentionally or otherwise, are disclosed in financial statements;
- All liabilities are properly valued according to generally accepted accounting principles consistently followed;
- There is proper classification and recording of the liabilities.
Objects of Verification of Liabilities
The objectives of the auditor in verifying liabilities happen to be as under:
- The liabilities actually exist.
- The credit balance appearing in the books of accounts are really liabilities.
- Liabilities not recorded whether by accident or design are brought into books.
- The liabilities are properly valued.
- The liabilities are properly classified and disclosed.
- The liabilities are incurred in the course of legitimate business transactions.
- The liabilities are incurred, under the approval of an appropriate authority.
Generally the auditor has to examine the liabilities and satisfy that they really exist.
Schedule of debts
The auditor should obtain a schedule of debts due and outstanding expenses and vouch them with the entries in books and other documentary evidence.
Certificate from authority
The auditor must obtain a certificate from proper authority that all liabilities shown in the Balance Sheet are recorded in the book of accounts and no liability is omitted to be entered in the books.
Confirmation of creditors
The auditor can get confirmation from creditors and verify the confirmations with the ledger balance.
While the auditor has to verify and scrutinize each liability having regard to the nature of the liability, amount, purpose for which it is committed, the provisions made for payment of liability and other evidence, he should see that proper disclosures are made in the Balance Sheet and the amounts shown are real and correct.
In Re Westminster Road Construction Engineering Co. Lid (1932), the auditor was held guilty for misfeasance when he failed to detect the omission of liabilities from the Balance Sheet in circumstances where their omissions have been apparent.