Contingent liability
is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place
3 conditions of a contingent liability
- potential future payment for an outside party or an impairment of an asset that resulted from an existing condition
- there is uncertainty about the amount of the future payment or impairment
- the outcome will be resolved by some future events
If the likelihood of occurrence of the future outcome is probable and can be reasonably estimated …..
Financial statements accounts are adjusted
dr loss/expense
cr liability
if the likelihood of occurrence of the future outcome is probable and the amount cant be estimated
note disclosure
Contingent Liabilities example
- pending litigation
- income tax disputes
- product warranties
- guarantees of obligations of other parties
main objective in verifying CL
- evaluating the accounting treatment of known contingent liabilities
- identifying any CL not already identified by the client
to find unidentified contingencies/commitments or evaluate known contingencies/commitments the following procedures can be performed
- inquiry of management
- Reviewing income tax reports
- Reviewing minutes of meeting of shareholders, directors and management
- Reviewing documents
- obtaining letters from attorney
Review for subsequent events
a review of transactions and events that occurred after the balance sheet date to determine whether any of the transactions or events affect the fair presentation and disclosures of the current period statements.(extends to the date of auditor’s report and completion of auditing procedures )
subsequent events types
1-those that have direct affect on the financial statements and require adjustments. these involve events that were unclear that became clear and an adjustments to the financial statement of previous years is required
2-those dont have direct affect on the financial statements but for which a disclosure is required
final analytical procedures
it can be useful as a final review for material misstatement or financial problems. This is usually done by a partner where he considers:
- the adequacy of evidence gathered about unusual or unexpected account balances
- unusual or unexpected balances or relationships that were not previously identified
- the results may indicate the need of extra audit evidence and tests are necessary
Evaluate going concern
If a substantial doubt over going concern exists , the auditor should evaluate the management plans to avoid bankruptcy and the feasibility of achieving these plans.
obtain management representation letter
letter from client’s management documenting management’s most important oral representation made during the audit (refusal may lead to qualification or disclaimer of opinion) reasons for letter:
- to make management understand the importance of its responsibility of assertions in the financial statements
- to remind management of potential misstatements or omissions in the financial statements
- to document the response of inquiries
management representation letter issues
- information concerning fraud
- information about subsequent events
- that financial statements are presented fairly with conformity with accounting standards
after the audit is complete the auditor communicates with the audit committee :
-fraud and illegal acts
-internal control deficiencies
-other communication
he does this to :
-communicate his responsibility in the audit
-provide timing and scope for the audit
-give a report to those with governance
-also he write recommendation to the client about the business
