Question

Define what a contingency is, describe the auditor's main concerns about them, and indicate how contingencies should be dealt with by management and the auditor. Besides litigation, claims, and assessments, what are some other types of contingencies?

Answer 1

Ans. Contingencies are situations or conditions, the eventual outcome of which, profit or loss, would be determined or known only on happening, or non- happening, of an uncertain future event(s).

Auditor Concerns about Contigencies:-

The value at which contingencies are stated in financial statements depends on the information that is available on a date when the financial statements are considered and approved.

Events which occurs after balance sheet date which suggest that the asset might have been impaired, or a liability might have existed, at balance sheet date are, hence, taken into consideration in recognizing the contingencies and determining the value at which the contingencies are included in the financial statements.

Dealt by Management - Disclosure requirements would be applicable only with respect to such contingency.

Dealt by Auditor - To check the contigencies and whether disclosure is appropriate by the management.

Types of contigencies - Gain & Loss contigencies.