Search for unrecorded liabilities

To ensure the completeness of liabilities, auditors often perform a test called search for unrecorded liabilities. However, accountants preparing the financial statements can also perform this test to ensure the completeness of liabilities.

Search for unrecorded liabilities using cash and bank account

This test is done by evaluating the entries made in cash and bank ledger accounts after the reporting date. Period to be evaluated can vary depending on the average lead time of the goods being purchased, for instance, an accountant can choose 15 days or 30 days subsequent to the reporting date.

Payments made are linked to the relevant expenses and further evaluated to determine whether the expense was incurred in the current period or subsequent period. The accountant can skim through the entries and where he is doubtful, can dig further and check the supporting documentation. After determining the relevant accounting period, the original expense entry is identified to check whether it is recorded in the correct accounting period i.e., the accounting period in which the expense was incurred.

If an expense is identified that was incurred in current period, but the expense and related payment is recorded in the subsequent period, it is marked as an unrecorded liability. This is then rectified by recording the expense in the current period. Similarly, all liabilities that were erroneously missed and recorded in the subsequent period are identified and recorded in the correct period i.e., in the period in which the expense was incurred.

Following example will further clarify this concept.

Example – Search for unrecorded liabilities

In the above table, the third payment voucher is related to an expense that is not recorded in the correct accounting period. Repair work was done by the mechanic in December 20X1, therefore, the related expense should have been recorded in 20X1. As a result of performing the search for unrecorded liabilities, the company has identified this error which is rectified by recording repair expense and corresponding liability in 20X1.