You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to
A) accrue a $4 million liability.
B) disclose a liability and provide a range of outcomes.
C) since there is less than a 50% chance of occurrence, ignore.
D) since there is greater that a remote chance of occurrence, accrue the $10 million.

Question

Quizplus · Accepted Answer

The appropriate financial statement treatment in this situation is to disclose a liability and provide a range of outcomes. Accruing a liability or ignoring the potential loss would not be appropriate since the likelihood of the loss is significant enough to warrant disclosure. However, since the amount and timing of the loss are uncertain, a range of outcomes should be provided.

You Are Auditing Rodgers and Company