[Anonymous]

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file

B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance

C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions

Of the responses provided, vouching a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices would most likely be performed by an auditor searching for unrecorded liabilities.

This procedure would assure the auditor that the cash disbursements were not for liabilities which should have been recorded in the prior year.

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Tracing tests for completeness. Vouching tests for existence. If you want to make sure that there are no unrecorded liabilities, wouldn’t you make sure that all liabilities are in fact recorded, which would be completeness?

[Anonymous]

Disclaimer: I'm horrible at audit (and I just got hired as one! Hahahahahahahaha… Ha…)

Here's what I learned in a really boring training session last week though. You can't really do sampling for unrecorded liabilities, because the population for it is infinite.

For example, if you were to test the existence assertion for liabilities (lets say the client claims they have $1MM of debt outstanding at year end), you have two ends of a spectrum with regards to existence: None of the $1MM exists or all of the $1MM exists. So $0 to $1MM. If you sample say $0.1MM of debt and find a 10% deviation rate or something, then you can extrapolate that to the entire population (so I guess it'll be $100K of debt is off).

On the other hand, you can't really sample or extrapolate with the completeness assertion with debt. Say for example, just by pure chance you found out that the company had a $100K loan with a random bank.

What exactly does that tell you though? I mean, you can't really extrapolate that $100K to anything. For all we know, the sky's the limit. They could have $0 of unrecorded liabilities, or worst case scenario, an infinite amount of liabilities.

So the best we can do is to just check the cash disbursements to see if they paid off a loan we were not aware of. But you can't really extrapolate that (put a number to it).

[Pandarama]

In the problem, you're looking for liabilities that are NOT RECORDED. If you trace entries, then obviously they are already recorded.

When vouching in this problem, you're looking at items that have been created and you want to make sure those items were actually recorded.

BEC - 80
AUD - 64, 75 - credit lost, 90!!
REG - 73, 74, 83
FAR - 61, 72, 85

Feels good finishing on my best note. Time to watch the mailbox.

[Anonymous]

It does say vouch, but it sounds more like tracing.

What I don't get is let's say there was a payment made after year end, auditor is vouching/tracing it and discovers what exactly? The entry just has a credit (cash) side? Where does the debit go if there is no liability recorded? Suspense account?

[Anonymous]

I'm not sure what the journal entry is like. The point is though is that you've basically discovered the client making payments on a debt that you never knew existed (e.g. firm has a loan with bank A, but you've discovered a check cut to some random bank X).

[Pandarama]

If you went and vouched the item that was done after year end, you would see that the invoice was a bill for something prior to year end. Since we are assuming the company is accrual unless otherwise stated, they would record the item when it was accrued and not when it was paid. So they should've recorded the invoice in the year being audited.

If you were to trace an item from the audited year, you would just be looking for it's support. When you find the support, you'd then see that the invoice was for the audited year.

The difference is which way you go. Think of it as backwards and forwards. Trace = forward, vouch = backwards. If it's backwards, you go from the support to the journal entry. If it's forward, you go from the journal entry to the source.

BEC - 80
AUD - 64, 75 - credit lost, 90!!
REG - 73, 74, 83
FAR - 61, 72, 85

Feels good finishing on my best note. Time to watch the mailbox.

[Anonymous]

That would probably relate to cutoff assertion, the original question has to do with completeness (or existence?)

So if you go from cash disbursement to vendor invoice, is that tracing or vouching?

[leglock]

saved

[Anonymous]

When you’re doing a search for unrecorded liabilities, you are identifying liabilities from source documents and trying to find those that relate to before year end on the balance sheet/find those that don’t relate excluded from the balance sheet. The source documents that you identify from are the disbursement registers and bank statements from a defined period after year end, and then you obtain the related payment copies and invoices/POs/receiving reports/etc. for those selections. Essentially you’re using payments made after year end to help you find goods/services that were really provided before year end (creating a liability). This is a tracing process and is primarily a test of the completeness of liabilities. It’s very common.

If you were instead vouching liabilities, you would be picking liabilities definitely recorded on the balance sheet and obtaining the supporting documentation for them. This is primarily a test of existence of liabilities. It could identify liabilities that don’t have any support/whose amounts are recorded incorrectly. But it probably wouldn't find a liability if the client didn't book one in the first place. Hence, the risk profile of the client likely wouldn't suggest that this kind of test was necessary/effective.

What makes this question tricky is that it sort of misuses the technical definition of the terms vouch and trace. Answer A is really one step in a vouching process and Answer C is really one step in a tracing process. Many people use them interchangeably in practice. Focus on the concepts to get the answer.

[Martin]

I always get this questions wrong if I go by the definition of what is Vouching (existence) vs Tracing (Completeness). The problem is that I also get them right some times. The trick to all this is to read the possible answers more than once and think logically as to what it is that they want to accomplish disregarding the definition of Vouching and Tracing. If you go by pure definition of tracing then you wouldnt pick vouching for testing completeness.

Through God all things can happen!

“You never fail until you stop trying.”
― Albert Einstein
When I was young, I used to admire intelligent people;as I grow older, I admire kind people.
“Just keep swimming, just keep swimming.”

FAR= 72-84
Audit= 73-82
BEC= 74-75
Reg=77

[Martin]

Pandarama wrote=The difference is which way you go. Think of it as backwards and forwards. Trace = forward, vouch = backwards. If it's backwards, you go from the support to the journal entry. If it's forward, you go from the journal entry to the source.

The definition of vouching is when you go from F/S to support for existence,but here you are saying the opposite. The same thing goes for tracing.

Through God all things can happen!

“You never fail until you stop trying.”
― Albert Einstein
When I was young, I used to admire intelligent people;as I grow older, I admire kind people.
“Just keep swimming, just keep swimming.”

FAR= 72-84
Audit= 73-82
BEC= 74-75
Reg=77

[Martin]

Audit Novice, thanks for the explanation.

Through God all things can happen!

“You never fail until you stop trying.”
― Albert Einstein
When I was young, I used to admire intelligent people;as I grow older, I admire kind people.
“Just keep swimming, just keep swimming.”

FAR= 72-84
Audit= 73-82
BEC= 74-75
Reg=77

[Pandarama]

Martin, you're right – I had typed the two items backwards by accident. I wish I could correct my original post for anyone that comes across it so they don't get misled.

Now that I have my thoughts straightened, here's another way to think of trace vs vouch.

Vouch = “I vouch for this person”; We want to see what they are saying is true. The journal or register is what the company is saying to be true. So we go from the entry or F/S to the support/source document.

When I took audit, I memorized 2 sets of four letters. They were opposites of each other so I knew that if I was looking at one, then the other was the opposite.

CUTS (complete, understatement, trace, source document)

EOVF (exist, overstatement, vouch, financial statement)

Complete = if the transaction hasn't been processed correctly (forgot to record) then it is incomplete and this will cause an understatement in the financial statements.

Understatement = caused by an incomplete transaction.

Trace & source document = go hand in hand, trace the source document to the financial statement

Exist and vouch = the person who entered the transaction and completed the financial statements is saying that these items exist and they are vouching or giving their word.

Overstatement = if there is an item recorded but it does not actually exist, the financial statements will be overstated.

Financial statement = go from financial statement item to the source.

BEC - 80
AUD - 64, 75 - credit lost, 90!!
REG - 73, 74, 83
FAR - 61, 72, 85

Feels good finishing on my best note. Time to watch the mailbox.

[outstanding CPA]

I agree with Pandarama. Companies tend to understate their liabilities. They may try to omit accrued liabilities that should be included at year-end if the liabilities are paid in the beginning of the next year. By vouching these liabilities to the receiving documents, we are not testing their existence. This is a cut-off test to make sure that the unrecorded liabilities that paid after year-end do not belong to the year under audit.

Far 83 (Jan 2014)
Reg 90 (May 2014)
Bec 84 (Aug 2014)
Aud 99 (Nov 2014)
Ethics 96

[Author]

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