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The key answer tip for PACIFIC co. states:
Your procedures must address the risk that some of these liabilities have been omitted from the financial statements.
To test the assertion of completeness, your procedures must start from outside the accounting records.What does it mean to start “from outside the accounting records?”
I don’t know every Q by name, so it would be helpful if you could put a reference in the subject line (e.g. S/D22)
Nor do I know where you are seeing it having a “key answer tip” – but I would say it is slightly misleading.
A test for understatement is asking “is this population of transactions/account balances complete”? You can’t answer that Q by looking at what has been recorded – because it’s what hasn’t been recorded/omitted that is the issue. So your starting point is what SHOULD have been recorded.
Sometimes this will be “outside the accounting records” – for example, purchases/payables will be incomplete if goods received into inventory (especially just before the y/e) have not been recorded. The “source” in this case is goods received notes – matching them to purchase invoices and confirming that if they were not included in the customer’s account at the y/e, that they have been included in a “goods received not invoiced” accrual.
However, the source may be in the accounting records – only not the records you are testing for completeness.
A very important test for the completeness of liabilities is the scrutiny of payments after the end of the reporting period. That’s because you would expect most payments in the month or so after the reporting date to be in settlement of recorded liabilities. Suppose y/e 31/12 and on 5/1 there is a large payment that does not match a liability – the auditor would then need to match it to an invoice or contract showing that it is expense for the following year and not the year under audit (e.g. if it was monthly rent payable in advance).
Thank you very much for your very comprehensive reply!
I truly appreciate it!
I would ensure that I add the relevant year/attempt from which I have borrowed the question in the future.
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