Completing the Audit Engagement
CHAPTER 17
COMPLETING THE AUDIT ENGAGEMENT
Answers to Review Questions
17-1 A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that ultimately will be resolved when some future event occurs or fails to occur. FASB ASC Topic 450, “Contingencies,” classifies uncertainties into three categories:
1. Probable: The future event is likely to occur.
2. Reasonably possible: The chance of the future event occurring is more than remote but less than likely.
3. Remote: The chance of the future event occurring is slight.
Examples of contingent liabilities include:
• Pending or threatened litigation
• Actual or possible claims and assessments
• Income tax disputes
• Product warranties or defects
• Guarantees of obligations to others
• Agreements to repurchase receivables that have been sold
17-2 The auditor requests that the attorney provide the following information on pending or threatened litigation:
• A list and evaluation of any pending or threatened litigation to which the attorney has devoted substantial attention. The client may provide the list.
• A listing of unasserted claims and assessments considered by management to be probable of assertion and reasonably possible of unfavorable outcome.
• A request that the attorney describe and evaluate the outcome of each pending or threatened litigation. This should include the progress of the case, the action the entity plans to take, the likelihood of unfavorable outcome, and the amount or range of potential loss.
• A request for additions to the list provided by management or a statement that the list is complete.
• A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.
• A statement by management acknowledging an understanding of the attorney's professional responsibility involving unasserted claims and assessments.
• A request that
COMPLETING THE AUDIT ENGAGEMENT
Answers to Review Questions
17-1 A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that ultimately will be resolved when some future event occurs or fails to occur. FASB ASC Topic 450, “Contingencies,” classifies uncertainties into three categories:
1. Probable: The future event is likely to occur.
2. Reasonably possible: The chance of the future event occurring is more than remote but less than likely.
3. Remote: The chance of the future event occurring is slight.
Examples of contingent liabilities include:
• Pending or threatened litigation
• Actual or possible claims and assessments
• Income tax disputes
• Product warranties or defects
• Guarantees of obligations to others
• Agreements to repurchase receivables that have been sold
17-2 The auditor requests that the attorney provide the following information on pending or threatened litigation:
• A list and evaluation of any pending or threatened litigation to which the attorney has devoted substantial attention. The client may provide the list.
• A listing of unasserted claims and assessments considered by management to be probable of assertion and reasonably possible of unfavorable outcome.
• A request that the attorney describe and evaluate the outcome of each pending or threatened litigation. This should include the progress of the case, the action the entity plans to take, the likelihood of unfavorable outcome, and the amount or range of potential loss.
• A request for additions to the list provided by management or a statement that the list is complete.
• A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.
• A statement by management acknowledging an understanding of the attorney's professional responsibility involving unasserted claims and assessments.
• A request that