Search for Unrecorded Liabilities. C. Marsh, CPA, is the independent auditor for

Question

Search for Unrecorded Liabilities. C. Marsh, CPA, is the independent auditor for Compufast Corporation (Compufast), which sells personal computers, peripheral equipment (printers, data storage), and a wide variety of programs for business and games. From experience on Compufast's previous audits, Marsh knew that the company's accountants were very much concerned with timely recording of revenues and receivables and somewhat less concerned with keeping up-to-date records of accounts payable and other liabilities. Marsh knew that the control environment was strong in the asset area and weak in the liability area.

Required:

List substantive procedures that Marsh and the audit staff can perform to obtain reasonable assurance that Compufast's unrecorded liabilities are discovered and adjusted in the financial statements currently under audit.

Explanation / Answer

Introduction :

The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) has issued guidance on communicating matters related to a governments internal control over financial reporting identified in an audit of financial statements.

This guidance indicates that it is not sufficient that the independent auditor determine that the financial statements under audit are, in fact, fairly presented in accordance with generally accepted accounting principles (GAAP). Generally accepted auditing standards (GAAS) also require that the financial statements be the product of a financial reporting system that offers reasonable assurance that management is able to produce financial statements that comply with GAAP.

Recommendation:

Minimize the likelihood of material audit adjustments. Every practical step should be taken to minimize the possibility of material auditor-initiated audit adjustments. A periodic process during the year to ensure the ongoing completeness and accuracy of data can aid in identifying and preparing adjustments to limit the number and dollar amounts of adjustments that result from the auditor.
Further, procedures at the end of the period can also help limit auditor-initiated adjustments.
For example, an auditor and management should carefully review their cutoff procedures and the method it uses to uncover unrecorded liabilities at the end of the fiscal period .
Items found by the auditor rather than by management could result in a significant deficiency or material weakness being reported.

Special care also should be taken to ensure the timely and effective implementation of new accounting standards.

Accordingly, ongoing training should be provided to ensure that appropriate staff remains current on the authoritative guidance as it evolves. Every attempt should be made to ensure that such training is provided consistently even when the auditor experiences fiscal stress or tough economic times.

Review any financial statement preparation assistance provided by the independent auditors. If management chooses to make use of the services of the independent auditors in helping to prepare the financial statements as a matter of convenience, it should carefully document that a staff member with the requisite skills has reviewed all of the work performed by the auditor.

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