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Chapter 21

BUS 426 Chapter Notes - Chapter 21: Contingent Liability, Financial Statement, Costs In English Law


Department
Business Administration
Course Code
BUS 426
Professor
Michael Favere- Marchesi
Chapter
21

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Chapter 21 - Completing the Audit
Review for Contingent Liabilities and Gains
Contingent Liability: A liability that arises due to an existing
condition or situation involving uncertainty as to possible gains or
losses
o Conditions for the Existence of Contingent Liabilities:
There is a potential future payment to an outside party
that results from an existing condition
There is uncertainty about the amount of the future
payment
The outcome will be resolved by some future event or
events
o Management is responsible for identifying and deciding the
appropriate accounting treatment for contingent liabilities
o Auditor only evaluates the accounting treatment and identify
any contingencies not already identified
Contingency Treatment
Likelihood of Occurrence
Financial Statement
Treatment
Unlikely to Occur
No disclosure
Not determinable
Footnote disclosure
Likely to occur and the amount
can be estimated
Financial statement accounts are
adjusted
Likely to occur and the amount
cannot be estimated
Footnote disclosure is necessary
Common Procedures to Search for Contingent Liabilities
o Inquire of management
o Review current and previous years’ CRA notices of
assessment
o Review minutes and shareholders’ meetings
o Analyze legal expense for the period under audit
Commitments: Agreements that the entity will hold to a fixed set
of conditions, such as the purchase or sale of merchandise at a
stated price, at a future date, regardless of what happens to profits
or to the economy as a whole
Obtain Confirmation from Client’s Law Firms
o A way for auditors to evaluate known litigation or other claims
against the client
o Inquiry of the Client’s Law Firms: A confirmation letter in
a specific format from the client’s legal counsel informing the
auditor of pending litigation or any other information involving
legal counsel that is relevant to financial statement disclosure
If law firms don’t respond, its usually either:
They don't have knowledge of it
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