Definition
The search targets the completeness of liabilities. Common steps include testing subsequent disbursements, examining the unpaid invoice file and unmatched receiving reports, reading board minutes and contracts, confirming with major vendors including those with zero balances, and making inquiries of management and legal counsel.
Why it matters in an audit or review
Understated liabilities overstate earnings and working capital. An omitted liability has no ledger entry to vouch from, so testing has to start outside the ledger. The search responds to the risk that expenses or liabilities are understated, and its scope grows when the client is near a covenant limit or a bonus target.
Example
A vendor statement at December 31 shows $48,200 (illustrative), but the ledger carries $31,000 for that vendor. The auditor reconciles the two, finds three December invoices dated December 28 to 30 unrecorded totaling $17,200, and extends the same test to the next five largest vendors.
Common mistakes
- Testing only vendors with balances in the ledger.
- Starting from the recorded payables and vouching, which tests overstatement rather than omission.
- Closing the window early.
FAQ
Does confirmation work for unrecorded liabilities?
Yes, when requests go to vendors with significant activity but little or no recorded balance and ask the vendor to report the amount owed.
Sources
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
- AICPA, AU-C Section 500, Audit Evidence
- AICPA, AU-C Section 505, External Confirmations
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error