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WorksheetsT8- Contingent Liabilities
Total questions: 10
Worksheet time: 10mins
If a potential loss on a contingent liability is remote, the liability usually is
disclosed in the auditor's report but not disclosed on the financial statements.
neither accrued nor disclosed in footnotes.
disclosed in footnotes, but not accrued.
accrued and indicated in the body of the financial statements.
A commitment is best described as
an agreement to commit the firm to a set of fixed conditions in the future.
an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.
a potential future obligation to an outside party for an as yet to be determined amount.
an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.
Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
management and the auditors
auditors
management
legal counsel
You are auditing Rahman Sdn. Bhd. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a RM10 million payment could result from the non-compliance. The appropriate financial statement treatment is to
disclose a liability and provide a range of outcomes.
since there is greater that a remote chance of occurrence, accrue the RM10 million.
since there is less than a 50% chance of occurrence, ignore.
accrue a RM4 million liability.
Audit procedures related to contingent liabilities are initially focused on
occurrence
accuracy
completeness
existence
Define the term contingent liability and discuss the criteria accountants and auditors use to classify these accounting events.
What are the three required conditions for a contingent liability to exist?
If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true?
An audit firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys.
The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability.
The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.
Disclosure may be unnecessary if the contingency is highly remote or immaterial.
Contingent liability disclosure in the footnotes of the financial statements would normally be made when
the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.
the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made.
a reasonable estimation of the loss can be made, but the outcome is not probable.
the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.
Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions?
The outcome must be resolved by a third-party.
There is uncertainty about the amount of the future payment or impairment.
The outcome will be resolved by some future event or events.
There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.
