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Unformatted text preview: Chapter 23 Completing the Audit Review Questions 23-1 A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. Some examples would be: Pending litigation Income tax disputes Product warranties Notes receivable discounted Guarantees of obligations of others Unused balances of outstanding letters of credit An actual liability is a real future obligation to an outside party for a known amount from activities that have already taken place. Some examples would be: Notes payable Accounts payable Accrued interest payable Income taxes payable Payroll withholding liabilities Accrued salaries and wages 23-13 The weakness in Lawson's approach is the danger of discovering an inadequacy in one audit area which could affect other areas of the audit. For example, if misstatements were discovered as part of the tests of controls for sales, the initial plans for the tests of details of balances for accounts receivable may have been insufficient and should have been revised. Similarly, the audit of fixed assets is related to the contracts and notes payable whenever fixed assets are used as collateral. Another difficulty with Lawson's approach is that there is no combining of the misstatements in different audit areas to determine if the combined misstatements are material. If the combined misstatements are considered material, it may be necessary to expand the testing in certain areas or require adjusting entries to some balances. 23-1 23-14 The accumulation of audit evidence is crucial to the auditor in determining whether the financial statements are stated in accordance with generally accepted accounting principles, applied on a basis consistent with the preceding year. The evaluation of the adequacy of the disclosures in financial statements is made to determine that the account balances on the trial balance are properly aggregated and disclosed on the financial statements. Examples where adequate disclosure could depend heavily upon the accumulation of evidence are: The disclosure of declines in inventory values below cost The segregation of current from noncurrent receivables The segregation of trade accounts receivable from amounts due from affiliates The disclosure of contingent liabilities that the auditor has not been informed of by the client Examples where audit evidence does not normally significantly affect the adequacy of the disclosure are: Deciding whether a disposal of equipment should be recorded as an extraordinary item The disclosure of an acquisition as a pooling of interests or a purchase The disclosure of contingencies that the auditor was informed of by the client 23-21 a. (3) b. (1) c. (1) 23-22 a. (4) b. (3) c. (2) Discussion Questions And Problems 23-23 a. A contingent liability is a potential future obligation to an outside party for an unknown amount arising...
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This note was uploaded on 10/07/2011 for the course ACCOUNTING 4220 taught by Professor Brown during the Spring '11 term at UMBC.
- Spring '11