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    Audit issue: understatement vs overstatement of liabilities

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    Why are auditors more concerned about the understatement of liabilities than the overstatement of liabilities?

    © BrainMass Inc. brainmass.com June 3, 2020, 11:37 pm ad1c9bdddf
    https://brainmass.com/business/accounting-for-liabilities/audit-issue-understatement-vs-overstatement-liabilities-288244

    Solution Preview

    When you think about it, the entry to correct understated liabilities will mean there is a credit needed to increase liabilities. The problem then is: what is the debit side of the entry?

    Following are some examples of the possible consequences of understating liabilities:

    1. If the debit should have been to inventory, then cost of goods sold is probably understated. If cost of goods sold is too little, then ...

    Solution Summary

    In a 269 word solution, the response clearly explains the consequences of understatement and overstatement. Examples are included to show the results of both as well as the audit procedures which may reveal problems. Fraud examples are included as a very real possibility.

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