Contingent liability : Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts. Provision for contingencies: Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty. The auditor’s course of action if the given situation occurs.

Question

An audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry: The lawyer stated that there is only a remote chance that the client will lose. The client did not accrue any contingent loss or disclose this situation.

Answer 1

Question

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

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An audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry: The lawyer stated that there is only a remote chance that the client will lose. The client did not accrue any contingent loss or disclose this situation.

An audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry: c. The lawyer stated that there is a reasonable possibility that the client will lose. The client disclosed this situation, but did not accrue a loss.

An audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry: d. The lawyer stated that the client will probably lose between $250,000 and $500,000, but most likely will lose $400,000. The client accrued a $250,000 contingent loss and disclosed the situation.

Answer 2

Question

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

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Answer 3

Question

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

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Answer 4

Question

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

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Answer 5

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 6

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 7

Chapter 14, Problem 7RQSC

a

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.Contingent liabilities are not recorded in financial statements. Theseare only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 8

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 9

b

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 10

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 11

c

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 12

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 13

d.

To determine

Concept Introduction:

Contingent liability:

Contingent liability is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event. Contingent liabilities are not recorded in financial statements. These are only disclosed in notes to accounts.

Provision for contingencies:

Provision should be made for contingencies if it is probable that loss will occur, and the amount can be computed with reasonable certainty.

The auditor’s course of action if the given situation occurs.

Answer 14

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Answer 25

Ch. 14 - Prob. 6RQSC Ch. 14 - Prob. 7RQSC Ch. 14 - Prob. 21RQSC

Solution Summary: The author introduces the concept of Contingent liability, which is a potential liability under which outflow of resources is probable due to the happening of an uncertain future event.

Chapter 14 Solutions