These liabilities are found on business records under various titles such as accounts payable, vouchers payable, notes payable, accrued expenses and other current liabilities.
The audit procedures are as follows:
- Reconcile subsidiary ledgers with the control accounts. Request the taxpayer for explanation of any discrepancies noted.
- Note existence of debit balances in the general ledger or subsidiary accounts.
- Note accounts which have long overdue balances.
- Review computation of year-end accruals with respect to their deductibility as expenses or purchases.
- Examine legitimacy of accounts payable to affiliates or related taxpayers. Test check payments made by tracing the same to supporting documents. Investigate entries in the general ledger control accounts. Check unusual items such as those that do not originate from the voucher register or disbursement book.
- Be aware of any contingent liability by reviewing minutes of meetings and annual reports. Although this is not reflected in the tax return, an accrual may have been made for the item. Any claim for an expense or deduction arising from a contingent transaction shall not be considered as a deductible expense. A deductible expense must be reasonably determinable in amount and the liability must be fixed.
- If payables include liability on security deposits, secure a copy of the lease contract/agreement to determine provision on the application of lease deposits. These security deposits are taxable when received.
Reference: RAMO 1-2000