Quiz 17: Completing the Audit Engagement

Business

The three categories that are used to classify a contingent liability FASB ASC Topic 450 (Financial Accounting Standard Board Accounting Standard Codification), "Contingencies" are as follows: • Probable - The possibility of the happening of the events in the future is high. • Reasonably possible - The possibility of occurrence of the events is moderate, that is, neither too extreme nor too low. • Remote - The possibility of occurrence of the future events is much less. The four examples of the contingent liability are given below: • Claims not acknowledged as debts • Warranties on product defects • Land disputes • Legal disputes

Information provided by the attorney The information details that the auditor asks the attorney to provide on pending or threatened litigation are: • A list of pending or threatened litigation to which the attorney has considered as important and needs attention • A request to the attorney to give explanation of each pending litigation such as the amount of probable loss, possibility of occurrence of the liability, action to be taken by the entity on the happening of the unfavorable outcome, and the current status of the litigation • A list of unasserted claims to which the attorney estimated the probability of the occurrence of the unfavorable result • A request to the attorney to give a remark on the differences in his and the management's opinion on the evaluation of the unasserted claims • A request to the attorney to notify if there is any limitation to his response

The commitment results in the recognition of loss in the financial statements when the current market price of the goods purchased on commitments is found to be lesser than the commitment price. For example, a manufacturing company purchased the raw materials with a committed price of $700 per ton. However, he finds that the current market price of the raw materials is $500 per ton. The commitment results in a potential loss of $200 per ton img .

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