Question

Part A: When performing procedures in a search of unrecorded liabilities, auditors can utilize various sources of evidence/information (e.g., documents, files, management and clerical personnel).

Required: List at least five, but not more than seven, sources of evidence/information for the search for unrecorded liabilities.

Part B: You are in the last part of audit evidence gathering for the Anderson Corporation with a year end of June 30, 2018. Anderson’s CEO, Lisa Anderson, states that any invoices relating to the June 30, 2018 year end that were received after the year-end voucher register was closed for the June 30, 2018 year were recorded by Anderson’s CFO via a year-end adjusting journal for the year under audit. Anderson’s internal audit team also tested for unrecorded liabilities after the June 30, 2018 year end close. Lisa has indicated she will also provide a letter certifying there are no unrecorded liabilities for the June 30, 2018 year end.

Required:(a) Should your procedures for unrecorded liabilities be affected by the fact that the client made a journal entry to record June 30, 2018 that were received later? Explain your reasoning for your answer.

(b) Should your test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official certifies, to the best of that person’s knowledge, all liabilities that have been recorded? Explain your reasoning for your answer. (c) Should your test for unrecorded liabilities be eliminated or reduced because of the internal audit work. Explain your reasoning for your answer. What sources, in addition to the voucher register for the new year end, should you consider for locating possible unrecorded liabilities?

Answer 1

Answer:- five sources of evidence/information for the search for unrecorded liabilities.:-

1.Inquiry of client personnel,

2.open purchase order file,

3.unmatched vendor invoices listing,

4.the unmatched receiving reports, and

5. cash disbursements from the accounting period following the balance sheet date.

Other possible sources are vendor statements or confirmations.

Requirement a)

Even though Organizations CFO and Internal Auditors are assuring that there are no unrecorded liabilities for the June 30

year-end, Auditor should exercise professional skepticism and continue to apply the procedures as planned in search for invoices not recorded or journal adjustment entries not been passed for any payment made after the closure of books, expenses of which belongs to the period ended.

Apart from this if the client has identified all the invoices and passed adjustment journal entries, being an auditor we have to check whether those entries are correct or not.

therefore, it will add up in the list of procedures to check the completeness and accuracy of the transaction recorded as year-end journal entries.

Requirement b)

A letter obtained stating that management official certifies, to the best of that person’s knowledge, all liabilities that have been recorded.

The auditors use this letter as part of their audit evidence. The letter also shifts some blame to management, if it turns out that some elements of the audited financial statements do not fairly represent the financial results, condition, or cash flows of the business.

but obtaining the letter of representations from management does not discharge the auditor from his work, even though in inquiry or through LOR they are assuring that there are no unrecorded liabilities pending to be account for as on year-end date, auditor should apply all the procedures as planned to obtain substantive audit evidence,

Requirement C)

As per ISA - 610

External Auditors use internal audit more for control evaluation tasks than for substantive testing. Reliance on the work of internal audit affects the nature, timing, and extent of audit procedures performed by the external auditor.

In general terms, it appears that external auditors are more likely to use internal audit for control evaluation work than for substantive testing of account balances.

in this case, if auditors consider using the work of an internal auditor following points need to be taken care of :

1. Competence and integrity of the internal auditor/Team.

2. conclusion obtained by the internal auditor, if considered by the external auditor, the accountability of the report will lie with the external auditor, not with the internal auditor.

3. Relying upon the work of internal auditor does not discharge the auditor from performing the procedures planned for obtaining substantive and appropriate audit evidence, auditor must exercise professional skepticism and may reduce its nature time and extent of audit procedures based on confidence level on the report issued by the internal auditor.

What sources, in addition to the voucher register for the new year end, should you consider for locating possible unrecorded liabilities?

Already answered in the 1st question.

Bank statement - Payment above threshold ( Materiality )

events existing during the period that may rise to liability but not recorded in books.