contigent liability

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This is the sum of money that a company owes to outsiders only where there is an unknown future. The contingent liability effect on the company’s financial reporting would depend on the incident and the exact sum to be billed. For example, a company’s pending litigation could result in heavy penalties that a business must pay in the future. According to the Accepted Accounting Principles, any contingent obligations are likely to have to be included in the company’s books of accounts otherwise this financial statement would wind up being misinterpreted. In any company, the disclosure of these contingent liabilities will depend on whether the liability is material or not. The company’s auditors have to examine the materiality of the contingent liability before looking at any particular contingent liability. If a given contingent liability doesn’t exceed this limit, then it is unlikely going to have any substantial impact on the company. If the exact amount of contingent liability can’t be approximated, then the auditor has to note them the footnotes (Jubb, 2008). If the amount of contingent liability is probable, then a firm has to include the figure in the general ledger. For instance, a pending lawsuit that might be costly to the firm can be credited to the accrued liability account and debited to the legal expenses account. The auditor’s responsibility at this point is to verify that all the journal entries and accrued liability ledger to make sure that the are documented sufficiently.

According to the Financial Accounting Standard If a given firm has the liability that is probable then the amount of the liability must be estimated, and the amount has to accrue in a given financial statement. If the occurrence of the future event is probable and the amount cannot be estimated the contingent liability has to be disclosed as a footnote in the statement of financial position.

Pending or Threatened Litigation

Pending litigation refers to the potential future liability arising because of pending, threatened, and possible assertion, monetary charges, and lawsuits. Assessments and pending litigations are classified as contingent liabilities and have to be presented in the balance sheet as the current liability if the obligation is due in one financial year. So as to be presented as contingent liabilities, the obligation depends on a certain future event. If the occurrence of this future event is probable and a financial estimation can be placed on it, the company has to accrue the expense, and the amount must be presented on the balance sheet (Dexter, 1987). Before a lawsuit is recorded as a current liability the firm must make a consideration that: the amount of loss is reasonable, there must also be a likelihood of occurrence, factors such as advice of the firm’s litigation team must be considered, and lastly the liability or loss must occur in the current accounting period. Since the outcomes of a pending litigation can be difficult to predict with any precision, so many firms end up refraining from disclosing the estimate of the anticipated loss. Coming up with this form of disclosure can also weaken the company’s financial position. Because of this reason, most of are usually limited to the notes that appear on company’s financial position. Most of the litigations are disclosed in the footnote because the actual amount of the lawsuit cannot be estimated or the firms believe that the chance of the opposition winning is also probable (Valsamakis, Vivian & Du Toit, 2010).

Two Types of Subsequent Events

A subsequent event is events that in future after the reporting period, but before the companies, financial are available to be issued or have been issued. Depending on the situation on the situation that such an event has taken place it may or may not require to be disclosed in company’s financial statement. There are two types of subsequent events which are: the new events and the additional information. The new events provide some additional information on certain information that did not exist in the balance sheet. The additional information, on the other hand, provides information about certain events that already exists in the balance sheet including some of the information used to prepare financial information for that particular period such as the estimates used to prepare the financial statements (Hopkin, 2011). According to the various accounting standards, all the information that has to be added to the financial statements should include all the effects of the subsequent event and also provide some extra information about the conditions that exist in the statement of financial position (Valsamakis, Vivian & Du Toit, 2010).

Some of the significant events that make it necessary to adjust the financial statements include bad debts. If a company sold goods on credit to a customer and the customer goes bankrupt within the financial period, then it is important to make an adjustment in the doubtful debt account so that the amount of receivable reflect the actual value. Another significant event is the lawsuit. If a particular event occurs before the balance sheet date and triggers a lawsuit settlement and lawsuit it has to be adjusted as a contingent liability to match the amount of actual settlement. The recognition of any subsequent event can at times be quite subjective in many ways (Knechel, 2017). Given the amount of time that is required to make changes to the statement of the financial position at the last minute, it is important to make a consideration whether the subsequent event can be taken as not requiring a change in the books of account.

Dual Dating the Report

The dual date means the event that comes to the attention of the auditor between the period of issuance of the report and the report date; the financial statement might include such an event as either disclosure or an adjustment. Dual dating the report is quite significant in that it provides a means of including important information in the financial information footnote. This information is quite important to the external users because the auditor has to disclose all the events to the end of the field work. In this case, the responsibility is not taken for certain occurrences that take place at the end of field work. Dual dating aims at cutting off the subsequent event procedural responsibility at a much earlier date. With dual dating, two events for an accounting period are used for instance the adult date and the date of the event.

Auditing Standards

Auditing standards provide the necessary information that is essential in meeting the compliance needs of the assurance and audit professionals. The knowledge and even adherence to the auditing standards enable the auditing professionals to approach all the challenges facing them with a risk-based approach that is in line with the setup auditing rules and regulations. Various professional bodies have outlines various standards that have to be followed. The standards dictate how the firms that practice auditing have to structure their practices, reward, and train their professional staff on how to conduct the auditing engagement. Different professional bodies have various have ethical standards, reporting standards, audit performance, quality control standards, and independent standards that govern auditors in their day to day business conduct (Valsamakis, Vivian & Du Toit, 2010).

At the minimum, the auditing standards act as a caution that prevents the auditor from taking a certain direction. Just like mountain climbers, auditors to have no interest of falling from the cliff. An auditing that does not find errors that appear in the financial statement is simply undesirable. The auditing standards provide a path that enables the auditor to reach their goal. For the auditing standards to be relevant, then certain conditions must be met. The auditing standard must be updated on a regular basis to accommodate newer changes as well as well as accommodate the new accounting environment and policies. Secondly, the auditing professional have to be educated on a regular basis on the importance of adhering to the auditing standards as well as the current regulations.

Going Concerns Evaluation Process

Under the going concern, an organization is viewed to be operational for unforeseeable future. The business financial statements must, therefore, be prepared based on the going concern principle unless the institution is facing liquidation. The liabilities and asset are supposed to be an assumption that the firm will be able to discharge the liabilities and realize its assets in the when they fall due. Accountants in various institutions must obtain the sufficient information on the appropriateness of the management in the using of the going concern principle when they are preparing the financial statements (Messier, Glover & Prawitt, 2016). Any judgment about the organization future can be determined based on the information that is available; this might include the subsequent events. The subsequent events can lead to certain outcomes into outcomes that are somehow inconsistent with the judgment that was reasonable than when they were made.

In the going concern evaluation process, the auditor must assess whether some conditions or events may cast some doubt on the ability of a firm to operate forever. At this stage, the auditor has to assess whether the management has performed the initial assessment of the firm’s ability to continue operating for unforeseeable future. If such assessment has not be done, then it is the role of the auditor to discuss with the management on whether the events may cast any significant doubt on the ability of the firm to operate for enforceable. Full disclosure has to be made on any events that cast doubt on the ability of the firm to operate for unforeseeable future. The events should be significant to render the business unable to meet its obligations and realize assets (“Managerial Auditing Journal,” 2006.)

Reports on Audited Financial Statements

Reports of auditors are customarily issued with the firm’s financial statements that the statement of cash flows, retained earnings statement of income and the balance sheet. Each of the audited financial statement has to be specifically in the introductory part of the auditor’s report. The audited financial statement fairly presents all the material on the firm’s financial position results of the cash flows and operations in the agreement with the Accepted Accounting Standards. The audit report might only be formed when the auditor has formed the financial opinion. The auditor’s reports identify the audited financial position at the introductory stage and then goes further the auditor’s opinion in another paragraph. The basic elements of the audited financial position include the statement that an auditor has already conducted by acceptable accounting standards, the statement of financial position on the firm’s management and the statements that the auditor identified while auditing.


This an accounting principle that stipulates that any accounting matter that is trivial ought to be disregarded while all the important matter should be disclosed. Material items are those that are large enough. All the financial statement are prepared with the intention of helping firms to make economic decisions (“Special issue on Case study research in accounting, auditing, and business,” 2007). The financial information, therefore, remains critical and it is expected to impact the overall decision-making process; this implies that it has to be material. The material is quite important because it helps both the auditor and accountants in deciding on the figures that must be included in the books account and what is the maximum figure that has whose omission has to be avoided. When making on whether a given piece of information is material or not both the accountant and the auditor must make a considerable judgment. An item might be material may be due to the nature of the event or due to the size of the of the amount involved.

Special Reports

The company’s special reports entails the books of account that have been prepared in conformity with principles of accounting, specified items, accounts or elements of the financial statement, compliance of with all aspects or regulatory requirement or contractual agreement that relate to the audited financial statements and the financial information that has been presented in a certain prescribed schedule or form and require a prescribed form of audit reports. For the reporting a purpose the auditor must take into consideration the various forms of financial presentations that include the statement of cash disbursement and cash receipts, a summary of all operation, statement of cash flow and many others.

Auditing Investment/Financing

Auditing for investments is an examination of the company’s investment projects. Investment audit can give the most relevant information on the objects of investments and give more development at the preliminary stage. This form of auditing makes the exact analysis of the payment ability, reliability of the source of information and the constituent documents. The auditor should test the security of investments such as the client’s bonds and stocks (Reding, 2013). Testing investments are not different from testing other aspects of the financial statement such as cash. All the amount that are indicated as investments in the books of account must be represented in a right manner, and any changes in the values must be written correctly. If the company has a custody of some of the investments the auditor must maintain physical existence of the security.


Dexter, G. (1987). Audit and Business Change: a Case Study. Managerial Auditing Journal, 2(1), 12-16.

Hopkin, P. (2011). Fundamentals of risk management.

Jubb, C. (2008). Assurance & Auditing. South Melbourne: Thomson Learning.

Knechel, W. (2017). Auditing. New York: Routledge.

Managerial Auditing Journal. (2006). Managerial Auditing Journal, 21(4).

Messier, W., Glover, S., & Prawitt, D. (2016). Auditing & assurance services. New York, NY: McGraw-Hill Education.

Reding, K. (2013). Internal auditing. Altomonte Springs, Fla.

Special issue on Case study research in accounting, auditing, and business. (2007). Managerial Auditing Journal, 22(7).

Valsamakis, A., Vivian, R., & Du Toit, G. (2010). Risk management. Sandton: Heinemann.

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