[startupcfo]

When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?

Confirmation of negotiable receipts with holders.
Review of outstanding receipts.
Inspection of receiving and issuing procedures.
Observation of inventory.

This answer is correct because inspection of receiving and issuing procedures will permit the auditor to thoroughly evaluate the internal control over the custodial responsibilities of the warehouse employee. If the custodial responsibilities are not properly discharged, there may be significant unrecorded liabilities.

I’m confused – if people are stealing or damaging inventory in the warehouse, that will make us make us value inventory differently, it won’t create obligations.

Or are they saying the client is the warehouse itself (and not using someone else’s warehouse to store inventory), and therefore if your staff is damaging other people’s property, then you’ll have liabilities created?

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
AUD - XX | 09/10
FAR - XX | 12/10

[ruggercpa2b]

I think you are
interpreting the question wrong. Testing for unrecorded liabilities means you are looking for items that have been purchased at year end but not recorded on the books. It has nothing to do with theft, damage, or where inventory is stored.

AUD - 73, 72 retake 7/2/2016
BEC - 8/20/2016
REG - TBD
FAR - TBD

I am so ready for this nightmare to be over. Been at this way too long.

[fragchild]

A thing to remember is that auditors look at risks. In this example, the risk is unrecorded liabilities, which basically means whether the company is recording its liabilities (i.e. accounts payable or accrued expenses if no invoice received yet) for its purchased / received inventories.

What risk you seem to be incorrectly thinking of is the overstatement of inventory (due to damaged / missing inventory). This question seems to have mislead you by mentioning inventory.

If we look at the answers provided, we see the following:
1) This relates to proof of who owns the stock (assertion is rights and obligations)
2) I'm not exactly sure what this means, but if it relates to inventory that is still outstanding (i.e. has not been delivered by supplier). If not delivered, no liabilities exist (an exception is if the company bears the risk of shipping)
3) By reviewing the receiving procedures, we can check whether the accounts payable department is notified when inventory is received so they can record the liability
4) Observation just shows you that the inventory actually exists (assertion is existence). Also remember that observation doesn't provide evidence that the inventory is owned by the company (i.e. rights & obligation) which is another area where CPA will trick you.

[Missy]

The question is in regards to unrecorded liabilities. So if you've got something in inventory you should have a corresponding vendor bill. If you've got one thing in inventory that you haven't recorded a bill for, you've understated your liabilities.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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