Question

Problem Two - Chapter 8: 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 and describe at least five sources of evidence and / or information for the search for unrecorded liabilities.

Answer 1

Hello! As there are two separate questions asked by you, I am answering the first question only. Please ask second question separately.

Search for unrecorded liabilities is an important part of the audit procedure, as unrecorded liabilities by the management, whether intentionally or unintentionally, can significantly impact the financial statements in the final results of the company.

Five sources of evidence or information for unrecorded liabilities are:

1. Checking the vendor invoices to verify that all the payables are duly recorded in the books. Physical invoices raised by important vendors should be scrutinized to check any postponement of a liability.
2. Inquiries should be made with significant vendors and vendor confirmations should be floated, so as to confirm the balances as reflecting in the financials. This provides important evidence to the auditor regarding the genuineness of the vendor balances.
3. Another significant liability can be in case of any pending litigations against the company. Auditor should communicate with the litigation team or lawyer appointed by the company, to now about all the pending litigations against the company and their current status, so as to assess the appropriateness of their presentation in the financial statements.
4. Inquiry should be made to the management regarding their cut-off procedures for recording the liabilities materializing near the balance sheet end date. Proper sampling should be done for items coming before the end date and after the end date, to confirm their appropriate classification and recording dates in the books.
5. Discussions and meetings with the employees and general staff can be made to assess whether any major or significant expense or liability has arisen to the company after the balance sheet date. If such is the case, then the certainity of that event at the balance sheet date should be assessed and appropriately reflected in the financial statements,