Question

24-24 Elizabeth Johnson, CPA, has completed the audit of notes payable and other liabilities for Valley River Electrical Serv ices and now plans to audit contingent liabilities and commitments.

a. Distinguish between contingent liabilities and commitments and explain why both are important in an audit.

b. Identify three useful audit procedures for uncovering contingent liabilities that Johnson will likely perform in the normal conduct of the audit, even if she had no responsibility for uncovering contingencies.

c. Identify three other procedures Johnson is likely to perform specifically for the purpose of identifying undisclosed contingencies to help her obtain evidence about the presentation audit objective.

d. Identify three useful audit procedures for uncovering commitments that Johnson will likely perform as part of the audit in other accounts.

Answer 1

Requirement a

Contingent liability- is the probable upcoming obligation to an external party for an unidentified amount. Contingent liability befalls from past activities. While a commitment- is an agreement to pledge the entity to a set of fixed condition in the future, irrespective of any price variation.

Prominence of contingent liabilities and commitments in an audit:

Contingent liability and commitment are both vital in the course of an auditing as both of them affect the future cash flow accessible to stakeholders. As per the GAAP contingent liability and commitment should be revealed appropriately.

Requirement b

Following are the three beneficial audit procedures for uncovering contingent liabilities that Johnson will likely perform in the normal conduct of the audit, even if she had no responsibility for uncovering contingencies:

Assessing and appraising internal revenue agent reports of income tax settlements.

Appraising of minutes of board of directors and stockholders.

   Validation of used and idle balances of lines of credit.

Requirement c

Following are the three other audit procedures that Johnson is likely to perform specifically for the purpose of identifying undisclosed contingencies:

Enquire the management about unidentified contingencies liabilities.

Appraise the legal expenses for hint of contingencies liabilities.

Request the letter of attorney concerning the status of events and other latent contingent liabilities.

Requirement d

1. Analyse the minutes of directors’ and stockholders’ meetings.

2. Keep professional reservations when auditing company’s purchase records.

3. Keep professional reservations when audit company’s sales records