Question 1

Current professional auditing standards make it clear that management,not the auditor,is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities.

Accepted Answer

According to current professional auditing standards, such as the Generally Accepted Auditing Standards (GAAS) in the United States, management is ultimately responsible for identifying and deciding on the appropriate accounting treatment for contingent liabilities. The auditor's role is to assess management's process for identifying and disclosing these liabilities and to evaluate the adequacy of their related disclosures in the financial statements.

Question 2

Discuss three audit procedures commonly used to search for contingent liabilities.

Accepted Answer

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Question 3

Distinguish between contingent liabilities and commitments.

Accepted Answer

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Question 4

A lawsuit has been filed against your client.If,in the opinion of legal counsel,the likelihood your client will lose the lawsuit is remote,no financial statement accrual or disclosure of the potential loss would generally be required.

Accepted Answer

If legal counsel determines that the likelihood of losing the lawsuit is remote, no financial statement accrual or disclosure is generally required as the potential loss is not considered probable.

Question 5

An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known.This is an example of a(n)
A)commitment.
B)unasserted claim.
C)pending litigation.
D)subsequent event.

Accepted Answer

This situation describes an unasserted claim, which is a potential claim against the entity that has not yet been formally asserted or filed. The attorney is aware of a violation of a patent agreement that could result in a loss, but it has not yet been formally pursued.

Question 6

The first stop in the audit of contingencies is to determine the amount of the contingency.

Accepted Answer

The first stop in the audit of contingencies is to identify and evaluate the possible contingencies, not determine their amount. The amount can only be estimated after the contingency is evaluated.

Question 7

Three conditions are required for a contingent liability to exist.Which of the following is not one of those conditions?
A)There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.
B)The outcome must be resolved by a third-party.
C)There is uncertainty about the amount of the future payment or impairment.
D)The outcome will be resolved by some future event or events.

Accepted Answer

The three conditions required for a contingent liability to exist are:
1. There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.
2. There is uncertainty about the amount of the future payment or impairment.
3. The outcome will be resolved by some future event or events. 
The involvement of a third-party is not a requirement for a contingent liability to exist.

Question 8

With what types of contingencies might an auditor be concerned?

Accepted Answer

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Question 9

Define the term contingent liability and discuss the criteria accountants and auditors use to classify these accounting events.

Accepted Answer

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Question 10

The probability threshold for dealing with uncertainty in loss contingencies uses the terms likely and unlikely.

Accepted Answer

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Question 11

What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities?
A) 
B) 
C) 
D)

Accepted Answer

One of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities is attorney-client privilege. The information may be confidential and protected by law, and providing it could potentially harm the client's legal case.

Question 12

An environmental clean-up lawsuit is pending against your client.What information about the lawsuit would you as the auditor need in order to determine the proper accounting treatment?

Accepted Answer

The answer of An environmental clean-up lawsuit is pending against...

Question 13

What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel?
A) 
B) 
C) 
D)

Accepted Answer

The answer of What needs to be included in a...

Question 14

The standard inquiry to the client's attorney should be prepared on
A)plain paper (no letterhead)and be unsigned.
B)lawyer's stationery and signed by the lawyer.
C)auditor's stationery and signed by an audit partner.
D)client's letterhead and signed by a company official.

Accepted Answer

The answer of The standard inquiry to the client's attorney...

Question 15

Contingent liability disclosure in the footnotes of the financial statements would normally be made when
A)the outcome of the accounting event is deemed probable,but a reasonable estimation as to the amount cannot be made by the client or auditor.
B)a reasonable estimation of the loss can be made,but the outcome is not probable.
C)the outcome of the accounting event is deemed probable,and a reasonable estimation as to the amount can be made.
D)the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.

Accepted Answer

Contingent liability disclosure is made when there is a possibility of a loss occurring in the future, but the outcome is uncertain. If the outcome is deemed probable, but a reasonable estimation cannot be made, then the disclosure should be made in the footnotes of the financial statements to inform users about the potential risk involved.

Question 16

Management furnishes the independent auditor with information concerning litigation,claims,and assessments.Which of the following is the auditor's primary means of initiating action to corroborate such information?
A)Request that client lawyers undertake a reconsideration of matters of litigation,claims,and assessments with which they were consulted during the period under examination.
B)Request that client management send a standard inquiry to the client's attorney letter to those lawyers with whom management consulted concerning litigation,claims,and assessments.
C)Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify,evaluate,and account for litigation,claims,and assessments.
D)Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation,claims,and assessments.

Accepted Answer

The auditor's primary means of initiating action to corroborate information concerning litigation, claims, and assessments provided by management is to request that client management send a standard inquiry to the client's attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments. This is because the attorney letter is a tool used to obtain corroboration of information from legal counsel and to identify possible legal expenses or contingencies that have not been accrued in the financial statements. Choice A is incorrect because it suggests requesting client lawyers to undertake a reconsideration of matters, which is not the auditor's primary means of initiating action. Choice C is incorrect because requesting a legal opinion concerning policies and procedures is not related to corroborating the information provided by management. Choice D is incorrect because engaging outside attorneys to suggest wording for a footnote is not the auditor's primary means of initiating action to corroborate information provided by management.

Question 17

What are the three required conditions for a contingent liability to exist?

Accepted Answer

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Question 18

Auditors will generally send a standard inquiry to the client's attorney letter to
A)only those attorneys who have devoted substantial time to client matters during the year.
B)every attorney that the client has been involved with in the current or preceding year,plus any attorney the client engages on occasion.
C)every attorney whose legal fees for the year exceed a materiality threshold.
D)only the attorney who represents the client in proceeding where the client is defendant.

Accepted Answer

Auditors will generally send a standard inquiry letter to every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. This is done to obtain information about potential or pending litigation, claims, assessments and other contingent liabilities or commitments that could have a significant impact on the client's financial statements. The letter is a standard document that is used by auditors to gather information from attorneys quickly and efficiently.

Question 19

Many of the audit procedures for finding contingencies are usually performed as an integral part of various segments of the audit rather than as a separate activity near the end of the audit.

Accepted Answer

Many audit procedures for identifying contingencies, such as reviewing legal correspondence and evaluating warranties, are usually performed as part of other audit procedures throughout the audit rather than as a separate step at the end.

Question 20

Auditors,as part of completing the audit,will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company.The primary reason the auditor requests this information is to
A)determine the range of probable loss for asserted claims.
B)obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability,including court costs.
C)obtain an outside opinion of the probability of losses in determining accruals for contingencies.
D)obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.

Accepted Answer

The primary reason auditors request a standard inquiry to be sent to a client's attorney is to obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs. This helps the auditor assess the financial implications of these legal matters for the financial statements.

Quiz 24: Completing the Audit

Current professional auditing standards make it clear that management,not the auditor,is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities.

Discuss three audit procedures commonly used to search for contingent liabilities.

Distinguish between contingent liabilities and commitments.

A lawsuit has been filed against your client.If,in the opinion of legal counsel,the likelihood your client will lose the lawsuit is remote,no financial statement accrual or disclosure of the potential loss would generally be required.

An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known.This is an example of a(n)

The first stop in the audit of contingencies is to determine the amount of the contingency.

Three conditions are required for a contingent liability to exist.Which of the following is not one of those conditions?

With what types of contingencies might an auditor be concerned?

Define the term contingent liability and discuss the criteria accountants and auditors use to classify these accounting events.

The probability threshold for dealing with uncertainty in loss contingencies uses the terms likely and unlikely.

What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities?

An environmental clean-up lawsuit is pending against your client.What information about the lawsuit would you as the auditor need in order to determine the proper accounting treatment?

What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel?

The standard inquiry to the client's attorney should be prepared on

Contingent liability disclosure in the footnotes of the financial statements would normally be made when

Management furnishes the independent auditor with information concerning litigation,claims,and assessments.Which of the following is the auditor's primary means of initiating action to corroborate such information?

What are the three required conditions for a contingent liability to exist?

Auditors will generally send a standard inquiry to the client's attorney letter to

Many of the audit procedures for finding contingencies are usually performed as an integral part of various segments of the audit rather than as a separate activity near the end of the audit.