In order to identify existence of unrecorded liabilities, the most appropriate audit procedure is?
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Detailed below are some individual tests that can be applied in order to help satisfy the objectives noted in Audit objectives. It is not appropriate to undertake all of the tests; in each case, the auditor should review this bank of tests and determine which are most appropriate for the circumstances of the particular client being dealt with. The
auditor should, however, ensure that each objective is satisfied. The following tests are the standard tests in PCAS. Audit procedure Assertion being tested Obtain the year end creditors listing and reconcile back to the nominal ledger. A Need help? Get subscribed!To subscribe to this content, simply call 0800 231 5199 We can create a package that’s catered to your individual needs. Or book a demo to see this product in action. A search for unrecorded liabilities is a fundamental, almost universally applied procedure in all audits. The scope of such a search frequently includes a sampling of subsequent cash disbursements, which is an example of testing one population for understatement by sampling through a “reciprocal” population where unrecorded or otherwise missing balances or transactions are likely to reside. Unfortunately, in practice one often finds auditors sampling through subsequent disbursements without regard for as-yet unpaid purchase or expense invoices that have been entered post–balance sheet into a payables system (i.e., through a payables or purchases journal or voucher register) or that have not yet been entered into any system and are sitting on someone’s desk. Accordingly, auditors must understand the business’s method and timeliness (in relation to cutting checks) of recording payables and be cognizant of, and address, these risks. When there is a longer-than-usual time interval between recording payables and cutting the checks—a common circumstance with financially troubled entities or during periods of economic stress—an auditor should consider merging the populations from the post–balance sheet payables journal (or whatever it is called) and the disbursements journal and eliminate duplicates before sampling (IDEA or Excel software should be able to do this easily). Lastly, auditors should consider whether the client has an unentered invoice file that needs to be examined for possible underaccruals. If the business does not maintain physical control of the unentered invoices, then extended audit procedures such as payables confirmations are probably warranted. One certainly should not wait until near the end of the audit to make that decision. In certain circumstances, an alternative to sampling for searching for unrecorded liabilities might be more appropriate, such as when there are relatively few large vendors that account for a substantial portion of the year’s purchases and the year-end accounts payable. In such a case, a more effective and efficient audit procedure might be auditing reconciliations of recorded payables to vendors’ statements or confirmations. When the risk of unrecorded liabilities is not significant, a properly designed substantive analytical test might adequately reduce the risk of undetected material understatement of recorded payables. When the combined risk of material mis-statement from unrecorded liabilities is assessed as low, scanning the population for unusual items in lieu of sampling might sometimes provide sufficient audit comfort. Caution should be exercised, however, to ensure that this process is assigned to a member of the audit team with sufficient experience, judgment, and knowledge of the client to identify what is unusual. Many auditors have long believed that, whatever the selected procedure, a search for unrecorded liabilities should invariably be performed on a population that extends through the last day in the field (i.e., the report date). Under the principles of risk-based auditing, however, it is generally inefficient, and therefore unnecessary, to do so; rather, one should define the risk period during which unrecorded liabilities are likely to appear. Perhaps a more serious consequence of choosing a post–balance sheet test period that extends too far beyond the risk period is that it will cause any projected error to be overstated and unreliable. This is particularly true when findings (exceptions) are concentrated in the early part of the test period, which is normally expected to be the case except in the weakest of control environments. The appropriate length of such a period should ordinarily depend on an auditor’s risk assessment, based on the client’s observed pattern of recording payables or making payments and current financial health under prevalent economic conditions. Auditors should be cognizant that such conditions may likely have slowed down the client’s cash flows so that 1) the client’s staff may have been reduced or 2) for reasons of slow cash inflow, payables are processed and paid slower than in the past. Accordingly, during periods of economic stress, an auditor should consider for certain clients whether the “risk period” for defining the population for sampling should be lengthened from what it may have been in the past for certain clients. Howard B. Levy, CPA is a principal and director of technical services at Piercy Bowler Taylor & Kern, Las Vegas, Nev., and an independent technical consultant to other professionals. He is a former member of the AICPA’s Auditing Standards Board and its Accounting Standards Executive Committee, and a current member of its Center for Audit Quality’s Smaller Firms Task Force. He is a member of The CPA Journal Editorial Advisory Board. How do you find unrecorded liability?Search for Unrecorded Liabilities Examples
Select a sample of payment transactions after year-end. Examine the selected payments with the supporting documents (e.g. suppliers' invoices) to determine whether the liabilities were at the balance sheet date. Inquire the related personnel about any unrecorded invoices.
What procedures can be adopted by the auditor to detect unrecorded liabilities during an audit of the purchasing process?The auditor should verify the unrecorded liability by applying the given audit procedures:. The auditor shall verify purchase orders and all supporting documents with journal entries related to purchases and cash disbursals. ... . Analytical procedures are done in order to test the trend and look for unusual relations.. What are unrecorded liabilities?Unrecorded liabilities are those liabilities that are not shown in the balance sheet but still exist in the business.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? Vouch a sample cash disbursements recorded jsut after year end to receiving reports and vendor invoices.
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