Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Which analytical procedure result could indicate possible unrecorded liabilities?

1. Current ratio higher than prior year

2. Accounts payable as a smaller percentage of total liabilities

3. Accounts payable balance increase

4. Accounts payable turnover decreasing

The correct answer is: Accounts payable as a smaller percentage of total liabilities

The possibility of unrecorded liabilities can be indicated by a situation where accounts payable constitute a smaller percentage of total liabilities. This might suggest that, relative to other liabilities, the company may not have recorded all of its obligations. If accounts payable decrease as a proportion of total liabilities, it could be an indication that required expenses have not been recognized or recorded properly, leading to a scenario where liabilities are understated. In a healthy business environment, one would typically expect accounts payable to constitute a relatively stable or somewhat increasing percentage of total liabilities, as this reflects ongoing operations and the timely recording of obligations. A significant decrease in this percentage could raise red flags about the company's accounting practices concerning its liabilities. Other options, while they provide useful financial ratios or changes, do not directly imply the existence of unrecorded liabilities. For example, a higher current ratio may actually indicate improved liquidity rather than signal unrecorded liabilities. An increase in the accounts payable balance could suggest that the company is managing its payables effectively, further complicating any assumption regarding unrecorded liabilities. Likewise, a decreasing accounts payable turnover may highlight a slower process of paying bills but does not necessarily correlate directly with unrecorded liabilities.