Question 1

With what types of contingencies might an auditor be concerned?

Accepted Answer

The answer of With what types of contingencies might an...

Question 2

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 contingencies, such as reviewing contracts and legal correspondence, examining minutes of meetings, and analyzing financial statements for indicators of potential liabilities or losses, are typically performed throughout the audit process as part of other audit procedures. This approach allows the auditor to gather evidence and detect potential contingencies in a timely manner rather than waiting until the end of the audit to focus specifically on contingency-related procedures.

Question 3

One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold.

Accepted Answer

The primary approach in dealing with uncertainties in loss contingencies is the probability threshold, which assesses the likelihood of the contingency occurring.

Question 4

Companies ordinarily describe all commitments either in a separate footnote or combine them with a footnote related to contingencies.

Accepted Answer

This statement is true. Companies typically describe commitments in a separate footnote or combine them with contingencies in a footnote.

Question 5

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true?

Accepted Answer

The statement that the client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit is not true. The client's attorneys may have a conflict of interest and may not be able to provide an impartial evaluation. The auditor should obtain a separate evaluation from legal counsel who is independent of the client.

Question 6

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

Accepted Answer

The answer of Define the term contingent liability and discuss...

Question 7

If an auditor concludes there are contingent liabilities, then he or she must evaluate the

Accepted Answer

The answer of If an auditor concludes there are contingent...

Question 8

Auditing standards make it clear that the auditor is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities due to the complexity of this topic.

Accepted Answer

Auditing standards require the auditor to assess the appropriateness of management's use of accounting principles and their application in the financial statements, including the accounting for and disclosure of contingent liabilities, but it is management's responsibility to identify and decide the appropriate accounting treatment for contingent liabilities.

Question 9

Financial statement disclosure is required if the likelihood of occurrence of an event is probable, reasonably possible, or remote.

Accepted Answer

Financial statement disclosure is required for events that are probable or reasonably possible, but not for events that are considered remote.

Question 10

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 actually to assess the likelihood of the contingency event occurring and to evaluate whether it should be disclosed in the financial statements. Once the contingency is deemed probable and significant, the amount can then be estimated and disclosed.

Question 11

When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as

Accepted Answer

The use of probability thresholds for contingencies typically involves classifying the likelihood of the occurrence of an event as remote, reasonably possible, or probable. This allows for a more nuanced approach to assessing and managing risks, and can help ensure that appropriate measures are taken to mitigate potential threats. While other classifications such as slight, moderate, and great may also be used, they are not as commonly employed in this context. Similarly, while the terms likely and not likely are sometimes used in risk assessment, they may not provide enough detail to inform effective decision-making.

Question 12

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

Accepted Answer

Disclosure of a contingent liability in the financial statements' footnotes is appropriate when the likelihood of occurrence is probable, and the estimate of loss cannot be made with certainty. Thus, option A is correct, where the outcome is probable, and a reasonable estimation of loss cannot be made. Option B is incorrect, as in this case, the possibility of occurrence is uncertain despite estimating the extent of loss. Option C is incorrect, as the contingency's disclosure in the footnotes is only warranted when the estimation of loss cannot be reasonably made, even if the event of occurrence is likely. Option D is incorrect as the disclosure in the footnotes is not necessary where the outcome and loss cannot be estimated.

Question 13

When dealing with contingencies,

Accepted Answer

Contingencies require significant professional judgment to evaluate and determine the appropriate treatment. The auditor should consider the likelihood of the contingency, the potential impact on the financial statements, and management's handling of the contingency. All contingencies must be assessed throughout the audit, not just at the beginning and end. While disclosure or footnotes may be necessary, it is not the only option for handling contingencies. It is also not easy for the auditor to uncover contingencies without management's cooperation.

Question 14

Which of the following is not a common audit procedure used to search for contingent liabilities?

Accepted Answer

Payroll reports are not typically used as a common audit procedure to search for contingent liabilities. Instead, letters of credit, internal revenue agent reports, and legal expense analysis are more commonly used.

Question 15

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

Accepted Answer

The probability threshold for loss contingencies uses the terms "probable," "reasonably possible," and "remote," not "likely" and "unlikely."

Question 16

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 the likelihood of loss is remote, no financial statement accrual or disclosure of potential loss is required as per GAAP (Generally Accepted Accounting Principles).

Question 17

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

This is true. According to auditing standards, management is responsible for identifying, evaluating, and accounting for contingent liabilities. The auditor's role is to assess management's evaluation and ensure that it is reasonable and adequately disclosed in the financial statements.

Question 18

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

Accepted Answer

The third condition for a contingent liability to exist is that the outcome will be resolved by some future event or events, the first condition is that there is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition, and the second condition is that there is uncertainty about the amount of the future payment or impairment. The condition that the outcome must be resolved by a third-party is not necessary for a contingent liability to exist.

Question 19

A lawsuit has been filed but not yet resolved against an audit client. This lawsuit does not meet the conditions required for a contingent liability.

Accepted Answer

According to accounting standards, a lawsuit filed against an audit client that has not yet been resolved should be evaluated for potential loss and disclosure as a contingent liability. Therefore, this situation meets the conditions required for a contingent liability.

Question 20

Distinguish between contingent liabilities and commitments.

Accepted Answer

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Quiz 24: Completing the Audit