You were in the final stages of your examination of the financial statements of Ozine Corporation for the year ended December 31, 2011, when the corporation’s president came to talk to you. He believed that there was no point to your examining the 2012 acquisitions data files and testing data in support of 2012 entries. He stated that (1) bills pertaining to 2011 that were received too late to be included in the December acquisitions data files were recorded by the corporation as of the year end by journal entry, (2) the internal auditor made tests after the year end, and (3) he would furnish you with a letter confirming that there were no unrecorded liabilities.
Required
a. Should a public accountant’s test for unrecorded liabilities be affected by the fact that the client made a journal entry to record 2011 bills that were received late? Explain.
b. Should a public accountant’s test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official confirms that, to the best of his or her knowledge, all liabilities have been recorded? Explain.
c. Should a public accountant’s test for unrecorded liabilities be eliminated or reduced because of the internal audit tests? Explain.
d. Assume that the corporation, which handled some government contracts, had no internal auditor but that an auditor from the Auditor General’s office spent three weeks auditing the records and was just completing her work at this time. How would the public accountant’s unrecorded liability test be affected by the work of the auditor from the Auditor General’s office?
e. What sources in addition to the 2011 acquisitions data files should the public accountant consider to locate possible unrecorded liabilities?