Final answer:
It is true that symptoms of unrecorded contingent liabilities can be identified through analytical procedures applied to financial statement ratios. These ratios, when deviating from expected patterns, can signal the potential presence of contingent liabilities not reflected on the financial statements, prompting further investigation.
Step-by-step explanation:
True, symptoms of unrecorded contingent liabilities can indeed be found by performing analytical procedures on certain financial statement ratios. Contingent liabilities are potential liabilities that may occur depending on the outcome of a future event. They are not recorded on financial statements unless the liability is probable and the amount can be reasonably estimated.
By analyzing the financial ratios, such as the quick ratio, debt-to-equity ratio, and others, auditors and analysts can spot inconsistencies or trends that might suggest the presence of unrecorded liabilities. For example, if a company has a lawsuit pending which could become a liability, but has not been recorded due to uncertainty or estimation difficulties, the company's financial ratios may still reflect the potential for this liability if the outcome will have a significant financial impact.
Analytical procedures involve comparison of current year figures to prior years, industry averages, or budgeted amounts. Significant deviations from expected ratios might indicate that something is amiss, warranting a closer inspection. It's important to note that while such indicators can provide a hint, they are not a definitive proof and further investigation is usually required.
Therefore, it's essential for auditors and financial analysts to carry out these procedures to ensure the financial statements' integrity and to protect stakeholder interests. While the presence of atypical ratios does not confirm the existence of unrecorded contingent liabilities, it can trigger further exploration and assist in the risk assessment process during an audit or financial analysis.