Question

Describe and define the concept of unrecorded liabilities. Explain which steps can be taken to expose its expensive

Answer 1

Solution:-

The auditor searches for unrecorded liabilities because if the client has not recorded a liability, its financial position is overstated. For example, if a client has a loan from another party which is not recorded in the balance sheet, the client’s liabilities are therefore understated. Consequently, the client’s debt to equity ratio is lower than it actually is or in terms of total asset to total liability ratio, it is greater than it actually is.

In the context of purchases of inventory, an example of an unrecorded liability is a credit purchase of inventory that has not been credited to accounts payable. In this example,although the purchased inventory was not recorded as a payable (liability), the inventory items will be included in the stock take to cover up for a stolen stock. Finding the unrecorded liability in this case could shed light on inventory control problems which are not revealed by a simple stock take.

It is important to search for unrecorded liabilities in order for the auditor to ensure that completeness assertion is not at risk. Auditor must be confident that all liabilities for the period included all amounts owed by the client to their suppliers at the end of the reporting period.