CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceEasy
An auditor is performing substantive procedures on the accounts payable balance. The auditor selects a sample of cash disbursements made shortly after year-end and traces them to supporting documentation, such as vendor invoices and receiving reports, to determine if the related liabilities were recorded in the correct period. This procedure is primarily designed to address which assertion?
- ACompleteness
- BValuation and Allocation
- CRights and Obligations
- DExistence
Show answer & explanationAnswer & explanation
Correct answer: A. Completeness
This procedure, often called a 'search for unrecorded liabilities,' focuses on finding liabilities that should have been recorded but were not. By looking at post-year-end disbursements, the auditor can identify payments for services or goods received before year-end, thus addressing the completeness assertion for accounts payable.
Why the other options are wrong
- B. Valuation and allocation concerns whether recorded liabilities are at appropriate amounts; this procedure deals with whether they are recorded at all.
- C. Rights and obligations assert that the entity has a legal obligation for recorded liabilities; this procedure seeks to ensure all obligations are recorded.
- D. Existence tests whether recorded liabilities actually exist; this procedure looks for unrecorded ones.
Completeness Assertion (Accounts Payable)
The completeness assertion for accounts payable states that all liabilities that should have been recorded are recorded.
- Crucial for detecting understatement of liabilities.
- Often tested by searching for unrecorded liabilities.
- Involves examining transactions occurring after year-end.
Memory trick: Every CPA Has a Right to Value Completeness.