Definition
The auditor obtains a list of cash disbursements for a period after year end, often several weeks, then selects items above a threshold and examines the invoice, receiving report and service dates. Items that relate to goods or services received before the balance sheet date should have been accrued or recorded in accounts payable.
Why it matters in an audit or review
It is a standard procedure for testing completeness of liabilities and expenses, because a payment made after year end leaves evidence outside the ledger. The result depends on the length of the window and the threshold chosen. A short window will miss items such as large annual invoices paid in the second quarter, so other procedures like inquiry and reading contracts are needed too.
Example
The auditor examines all January and February disbursements over $5,000 (illustrative), which is 74 items. Two relate to December services: a $27,000 legal bill and a $12,400 freight invoice. None was accrued, so $39,400 of unrecorded liabilities is added to the proposed adjustments, and the accrual process is considered for a control comment.
Common mistakes
- Stopping the window at the report date even though larger payments may come later.
- Using the payment date, rather than the service date, to judge the period.
- Setting the threshold above performance materiality.
FAQ
Is this the same as a search for unrecorded liabilities?
It is one part of it, alongside reading minutes, contracts and unpaid invoice files.
Sources
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
- AICPA, AU-C Section 500, Audit Evidence
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