Auditors should be aware that a voucher system may result in which of the following at year-end: Multiple Choice Understatement of owners’ equity. Understatement of liabilities. Overstatement of expenses. Overstatement of assets.
The correct answer and explanation is:
The correct answer is: Understatement of liabilities.
Explanation:
A voucher system is an internal control process used by organizations to ensure that payments are properly authorized before cash or checks are issued. In this system, each payment is supported by a voucher, which includes documentation such as purchase orders, invoices, and receiving reports. The voucher system helps control disbursements and maintains a record of obligations and payments.
How it relates to year-end financial statements:
At the end of the accounting period, some liabilities may arise from expenses incurred but not yet paid or recorded—commonly called accrued liabilities or accounts payable. The voucher system focuses on authorized payments rather than accrued liabilities. If vouchers are only prepared when invoices are received and approved for payment, there is a risk that some expenses incurred just before year-end are not yet vouched or recorded.
This can cause:
- Understatement of liabilities: Because not all incurred expenses or obligations have been recorded, the liabilities (accounts payable or accrued expenses) on the balance sheet are understated.
- Understatement of expenses: When liabilities are understated, the related expenses are also understated since expenses need to be recognized in the period they are incurred, regardless of payment status.
Why other options are less likely:
- Understatement of owners’ equity: Owners’ equity is affected by net income and other transactions. An understatement of liabilities (and expenses) would typically overstate net income, which in turn would overstate owners’ equity, not understate it.
- Overstatement of expenses: This is unlikely since the voucher system typically causes some expenses to be missed (not recorded), resulting in expense understatement rather than overstatement.
- Overstatement of assets: The voucher system controls liabilities and expenses. Assets are generally not directly overstated due to voucher system issues at year-end.
Summary:
Auditors should be aware that a voucher system may cause liabilities to be understated at year-end because some expenses incurred may not yet have been authorized and recorded through vouchers. This is a common timing difference issue that affects the accuracy of the financial statements, especially liabilities and expenses, leading to potential misstatements if not properly audited.