Chapter 17-Auditing

Chapter 17-Auditing - 1 Chapter 17-Completing the...

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Unformatted text preview: 1 Chapter 17-Completing the Engagement Review for Contingent Liabilities -Contingent liability- existing situation, condition, or set of circumstances involving uncertainty about a possible loss that will be resolved when a future event occurs or fails to occur -Categories used to assess whether a future event will result in a loss: 1. Probable- future event is likely to occur 2. Reasonably possible- chance of future event occurring is more than remote but less than likely 3. Remote- chance of future event occurring is slight -If the event is probable and amount of loss can be estimated, loss is accrued by a charge to income - Disclosure of contingency is made if the event is reasonably possible or the amount can’t be estimated-Loss contingencies that are remote are not accrued in the FS nor disclosed in footnotes -Examples of contingent liabilities: • Pending or threatened litigation • Actual or possible claims and assessments • Income tax dispute • Product warranties or defects 2 • Guarantees of obligations to others • Agreements to repurchase receivables that have been sold Audit Procedures for Identifying Contingent Liabilities 1. Reading the min. of meetings to identify major events and approvals for sig. transactions 2. Reviewing contracts, loan agreements, leases, and info. from gov’t agencies 3. Reviewing income tax liability, tax returns, & IRS agents’ reports to determine if the IRS has audited the previous year’s tax returns and if so look at the agents’ reports to see if the entity will contest the additional assessment 4. Confirming/documenting guarantees and letters of credit from banks and lending agencies -Near completion, specific audit procedures to identify contingent liabilities : 1. Talking to management about its policies for identifying, evaluating, and accounting for contingent liabilities. o Large corp. implement policies within their risk assessment process o Small corp. rely on legal counsel to identify and account for them 2. Examining the firm’s records like correspondence and invoices from lawyers for pending/threatened lawsuits 3. Getting a legal letter that describes/evaluates any litigation, claims, or assessments 4. Obtaining written representation from management that all litigation asserted and unasserted claims, and assessments have been disclosed in accordance with FAS 5 3 Legal Letters- Legal letter- letter of audit inquiry that’s sent to the client’s attorney; is primary means of obtaining info. about litigation, claims, or assessments -Legal letter sent from client should ask its attorneys to provide the following info:...
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This note was uploaded on 04/21/2011 for the course ACCOUNT 604 taught by Professor Brown during the Fall '11 term at Rutgers.

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Chapter 17-Auditing - 1 Chapter 17-Completing the...

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