Question

Identifying Loss contingencies

Once the audit evidence is gathered and the testing is complete, how do you know there are no other items outstanding? To ensure the audit is complete, it is important to examine loss contingencies.

Jason Long, CPA, has completed his examination of accounts payable and other liabilities of the Jackson Company. He has now shifted his attention to search for any loss contingencies by looking for litigation, claims, and other types of assessments.

How should Jason Long plan to search for these loss contingencies?

What are some sources he can use to identify if loss contingencies exist?

What should be considered when reporting loss contingencies

Answer 1

Contingencies are the conditions where there is a probability of occurrence of loss or gain to a series of events to take place in the near future.

How to search for loss contingencies, its sources and considerations for reporting this thing:

1. As soon as the loss contingency which can be probable is identified it is to be recorded immediately in accrual aspect and then it should be mandatorily mentioned in the footnote of the financial statements.

2. If the loss contingency is not identified as as long as the auditor is confident about the nil probability it is ignored.

3. Premiums offered to customers, receivables collections, warranties offered to customers are some examples where accrual is possible and you usually record them and mention in the footnote.

4. Fire explosions, unspecified business risks are not accrued and mentioned.

5. There are many insurance companies which can cover some of these loss contingencies and the auditor might suggest to adopt them and prevent them as far as possible