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Answer: 1.There is potential for future payment to an outside party or the impairment of an asset that resulted from an existing condition2.There is uncertainty about the amount of the future payment or impairment3.The outcome will be resolved by some future event or eventsTerms: Conditions for contingent liability to existDiff: ModerateObjective: LO 24-2AACSB: Reflective thinking skills9
21) 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?22) Discuss three audit procedures commonly used to search for contingent liabilities.Answer: •Inquire of management (orally and in writing) about the possibility of unrecorded contingencies.•Review current and previous years' internal revenue agent reports for income tax settlements.•Review the minutes of directors' and stockholders' meetings for indications of lawsuits or other contingencies.•Analyze legal expense for the period under audit, and review invoices and statements from legal counsel for indications of contingent liabilities.•Obtain a letter from each major attorney performing legal services for the client as to the status of pending litigation or other contingent liabilities.•Review audit documentation for any information that may indicate a potential contingency.