Question

1. Define contingent liabilities and describe the types of events that might create a contingent liability. Describe places auditors might look for contingent liabilities.

2. Explain how auditors treat events that occur after the end of the fiscal year being audited but before the audit opinion has been issued. Describe steps auditors use to identify those events.

Answer 1

Contingent liabilities

A contingent liability is a potential liability...it relies upon a future occasion happening or not happening. For instance, if a parent ensures a girl's first auto advance, the parent has a contingent liability. On the off chance that the girl makes her auto installments and pays off the advance, the parent will have no liability. In the event that the little girl neglects to make the installments, the parent will have a liability.

Example

In the event that an organization is sued by a previous worker for $500,000 for age segregation, the organization has a contingent liability. In the event that the organization is discovered liable, it will have a liability. Be that as it may, if the organization isn't discovered liable, the organization won't have a genuine liability.

Where to locate

A contingent liability ought to be recorded in the financial statements when (an) it is likely that a liability has been brought about and (b) the measure of the misfortune can be sensibly evaluated.

Assuming either (an) or (b) does not make a difference, at that point an organization should put a revelation about the liability in the commentaries (i.e. notes to the financial statements).