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Audit: Unrecorded Liabilities for Scott Corporation

You were in the final stages of your audit of the financial statements of Scott Corporation for the year ended December 31, 20X0, when you were consulted by the corporation's president, who believes there is no point to your examining the 20X1 voucher register and testing data in support of 20X0 entries.

He stated that
(1) bills pertaining to 20X0 that were received too late to be included in the December voucher register were recorded as of the year-end by the corporation by journal entry,
(2) the internal auditors made tests after the year-end, and
(3) he would furnish you with a letter representing that there were no unrecorded liabilities.

a) Should the independent auditors' test for unrecorded liabilities be affected by the fact that the client made a journal entry to record 20X0 bills that were received late? Explain

b) Should the independent auditors' test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official represents that to the best of his knowledge all liabilities have been recorded? Explain

c) Should the independent auditors' test for unrecorded liabilities be eliminated or reduced because of the internal audit tests? Explain.

d) Assume that the client company, which handled some government contracts, had no internal auditors but that auditors for a federal agency spent three weeks auditing the records and were just completing their work at this time. How would the independent auditors' unrecorded liability test be affected by the work of the auditors for a federal agency?

e) What sources in addition to the 20X1 voucher register should the independent auditors consider to locate possible unrecorded liabilities?

Text used: Principles of Auditing and Other Assurance Services, 17e, Whittington/Pany

Solution Preview

a) Should the independent auditors' test for unrecorded liabilities be affected by the fact that the client made a journal entry to record 20X0 bills that were received late? Explain

No, the client does not have perfect future vision. It is good that they attempted to accrue in all unpaid and not invoiced materials and services but there is no way to know that they got them all without testing. In addition, audits are not based on "believing the client." Auditing is an independent verification of material amounts. As such, the auditor has a duty to examine evidence and not just accept the client's good practices as the end of the audit procedure. A good control process can reduce procedures used to test completeness of liabilities but not eliminate them.

b) Should the independent auditors' test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official represents that to the best of his knowledge all liabilities have been recorded? Explain

No, management has an incentive to misstate the financial results. In addition, they typically have a more ...

Solution Summary

Your tutorial is 381 words plus 3 references including ten ideas (in bullet format) for auditing unrecorded liabilities other than vouching payments after year end.

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