Auditing and Ethics · Audit of Items of Financial Statements

Audit of Liabilities and Share Capital: CA Intermediate Auditing and Ethics

Updated 4 October 2026 · Fact-checked

Audit of liabilities and share capital means gathering evidence that every liability is recorded, complete, correctly valued and properly disclosed, and that share capital and reserves comply with the law. The key risk is understatement of liabilities. Answer by assertion: vouch, confirm, test cut-off, check disclosure.

Understand Audit of Liabilities and Share Capital

Auditing assets and auditing liabilities look at opposite risks. For assets, the main fear is that they are overstated or do not exist. For liabilities, the main fear is that they are understated or left out. A company that hides a liability looks richer and safer than it is. So your focus is completeness.

The assertions you test change with the item. For liabilities, think of completeness, existence (obligation), rights and obligations, valuation and allocation, and presentation and disclosure. For share capital, think of authorised limits, valid allotment, receipt of money, and correct disclosure.

Start with where the evidence is. Trade payables: supplier invoices, statements and goods received notes. Borrowings: loan agreements, sanction letters and lender confirmations. Provisions and contingent liabilities: past events, legal letters, board minutes and management estimates. Share capital: the Memorandum and Articles, board and shareholder resolutions, share register, bank statements and the Registrar's or depository records.

Provisions and contingent liabilities are judgement areas. A provision is a present obligation from a past event where an outflow is probable and the amount can be reliably estimated. A contingent liability is a possible obligation, or a present obligation where outflow is not probable or cannot be measured reliably. It is disclosed, not recognised. Accounting for both follows AS 29. Your job as auditor is to test whether management classified them correctly.

Also keep in mind the Companies Act, 2013 presentation in Schedule III. Borrowings, trade payables and provisions must be classified as current or non-current, and share capital and reserves must be shown with the required details. The auditor checks the classification and the notes.

Key rules to remember

Core risk for liabilities: Main assertion = Completeness (risk of understatement); Design procedures to find unrecorded liabilities, not only to check recorded ones.
Provision recognition test (AS 29): Present obligation + past event + probable outflow + reliable estimate = Provision; All conditions must be met. Otherwise it is a contingent liability or nothing.
Contingent liability treatment: Possible obligation, or not probable / not measurable = Disclose, do not recognise; If outflow is remote, no disclosure is needed.
Trade payables test: Supplier statement balance ± reconciling items = Ledger balance; Use reconciliations and subsequent payments to test completeness and cut-off.
Share capital checks: Issued capital ≤ Authorised capital; allotment valid; money received; Verify with Memorandum, resolutions, share register and bank statements.

How to solve Audit of Liabilities and Share Capital questions

Use this method for any question on auditing a liability or share capital item.

1Name the item and its main risk. For liabilities it is understatement. For share capital it is legal compliance and disclosure.
2List the assertions to test: completeness, existence or obligation, valuation, cut-off and disclosure.
3Write the documents to examine: invoices, agreements, confirmations, resolutions, registers, legal letters.
4Write the procedures in order: inspect, confirm, recompute, reconcile, review subsequent payments and events.
5Add the legal and standard checks: Schedule III classification, AS 29, Companies Act compliance, and charges and covenants for borrowings.
6State the reporting angle: whether disclosure is adequate, whether a modification is needed, and any CARO or IFC point.
7Close with a one-line conclusion on whether the item is fairly stated.

Quickest way: Assertion-Document-Procedure grid

When to use it: Use it when a question says 'how will you audit X' or 'what are the auditor's duties regarding X' and time is short.

Write the item at the top of your answer.
In bullets, pair each assertion with one document and one procedure, for example completeness with supplier statements and subsequent payments.
For MCQs, eliminate options that treat liabilities like assets, such as focusing on overstatement only.
For MCQs on provisions and contingencies, ask: is it probable and measurable? Yes means provision. Possible only means disclose.
Finish with disclosure and a reporting point so the answer has a clear ending.

Common mistakes in Audit of Liabilities and Share Capital

Testing only recorded payables and ignoring unrecorded ones.
Students copy the asset approach of tracing ledger entries to documents.
Fix: Start from outside the ledger: subsequent payments, supplier statements, goods received notes after year end and unmatched invoices.
Treating every contingent liability as a provision.
The terms sound similar.
Fix: Apply the test: present obligation, probable outflow and reliable estimate gives a provision. Otherwise disclose or ignore if remote.
Relying on management's list of borrowings without confirmation.
The list looks complete and is easy to tick.
Fix: Get direct confirmations from lenders and check bank statements, agreements, interest and security details.
Forgetting current and non-current classification.
Students focus on amounts, not presentation.
Fix: Check repayment terms and the due date within twelve months, and the Schedule III classification of each borrowing and payable.
Skipping legal checks for share capital.
Share capital is seen as a simple opening balance.
Fix: Verify authorised limit, valid allotment, receipt of money, share register, and compliance with the Companies Act and filings.
Giving a generic answer with no documents or procedures.
Students write theory instead of audit steps.
Fix: Name the document and the action in each point so the examiner sees evidence-based procedures.

Worked examples

Example 1

You are auditing the trade payables of a manufacturing company. Explain the procedures you would perform to confirm that all liabilities are recorded.

Show the solution

Identify the risk: trade payables may be understated through omitted invoices or wrong cut-off, so the key assertion is completeness.
Obtain the payables listing and agree the total to the general ledger and the financial statements.
Obtain supplier statements for major suppliers and reconcile them to ledger balances. Investigate differences.
Review payments made after the year end and check whether the related invoices were recorded in the correct period.
Examine goods received notes near the year end to confirm that goods received before year end have matching liabilities.
Check unmatched or unbilled receipts and accrued expenses for completeness.
Check debit balances, related-party balances and disputed amounts, and confirm correct classification and disclosure under Schedule III, including any amounts due to micro and small enterprises.

Answer: The auditor focuses on completeness and cut-off. Using supplier statements, subsequent payments, goods received notes and a review of accruals, the auditor gets evidence that all liabilities at the year end are recorded and properly disclosed.

Example 2

During the audit, a company has a pending legal claim of ₹40,00,000. Its lawyer says an adverse outcome is possible but not probable. How should the auditor evaluate the treatment?

Show the solution

Identify the item: a claim against the company arising from a past event, so AS 29 applies.
Apply the provision test: a provision needs probable outflow and a reliable estimate. Here the outcome is only possible, so the test is not met.
Conclude that the claim is a contingent liability. It should be disclosed in the notes with a brief description and the estimated amount of ₹40,00,000, and should not be provided for.
Obtain a legal confirmation, read board minutes and correspondence, and discuss the matter with management to support the lawyer's assessment.
Obtain a written representation from management on the completeness of litigation and claims.
If the company wrongly makes a provision, or fails to disclose, evaluate the effect on the financial statements and consider a modified opinion if material.

Answer: The claim is a contingent liability, to be disclosed and not provided for. The auditor supports this with a legal letter, minutes and management representation, and reports if the treatment is wrong and material.

Exam tips

Whenever the question is about liabilities, say 'completeness' early. Examiners look for it.
Write procedures as verbs with documents: confirm with lenders, inspect agreements, reconcile statements, review subsequent payments.
For provisions versus contingent liabilities, state the AS 29 test in one line before applying it to the facts.
For share capital, include both legal compliance and bank evidence. Mention the Companies Act and the share register.
In MCQs, watch for options that reverse the logic, such as 'disclose a probable and measurable obligation only in notes'.

Practice questions from Audit of Items of Financial Statements

Audit of Liabilities and Share Capital in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Liabilities and Share Capital: frequently asked questions

Why is completeness the key assertion for liabilities?

Management may have an incentive to understate liabilities to show a better position. Missing liabilities are harder to find than recorded ones. So auditors test beyond the ledger, using subsequent payments and third-party evidence.

What is the difference between a provision and a contingent liability?

A provision is recognised when there is a present obligation, an outflow is probable and the amount can be reliably estimated. A contingent liability is a possible obligation, or one that does not meet the recognition test, and is disclosed in notes. Remote items need no disclosure.

How does an auditor verify borrowings?

The auditor inspects loan agreements and sanction letters, obtains confirmations from lenders, checks receipts and repayments with bank statements, and recomputes interest. The auditor also checks security, covenants, charges and classification between current and non-current.

What should I check when auditing share capital?

Check the authorised capital in the Memorandum, board and shareholder approvals, the validity of allotments, receipt of money in the bank statements, the share register and the disclosures. Also check that issued capital is within the authorised limit.