Question Tag: Contingent Liability

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AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

Question

A client company has prepared draft financial statements for the year ending December 31, 2020. In February 2021, a legal claim was made against the company, claiming substantial damages. The company’s lawyers have advised that the claim has less than a 50% chance of success. If the claim succeeds, the company would have sufficient cash resources to meet the claim in full.

The matter is disclosed in the draft financial statements in a note, as a material contingent liability.

Required:

Advise if the audit opinion should be unmodified, and if so, should the report contain a ‘Material Uncertainty Related to Going Concern’ paragraph? (3 Marks)
Discuss the form and content of a modified auditor’s report. (7 Marks)

Answer

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Tags: Contingent Liability, Financial Statement Disclosure, Legal Claim, Modified Auditor’s Report, s: Audit Opinion
Level: Level 3

Topic: Audit Reporting
Series: MAY 2024

FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

Question

The objective of IAS 37: Provisions, Contingent Liabilities, and Contingent Assets is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets, and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing, and amount.

Required:
Explain Contingent Liability and Contingent Asset as used in the statement above.
(Total: 3 marks)

Answer

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Tags: Contingent Asset, Contingent Liability, Disclosure, Financial Reporting, IAS 37
Level: Level 2

Topic: contingent liabilities and contingent assets
Series: JULY 2023

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

Question

Lexon Institute provides tuition for accountancy studies writing professional examinations. You are the audit manager of DAR and Co. Chartered Accountants. The following were identified during the financial audit of Lexon. Revenue is GH¢30m, Profit before tax is GH¢10 million and total assets is GH¢25 million.

i) The regulator of the Accountancy profession has filed a lawsuit against Lexon Institute for GH¢3.9 million alleging a non-compliance with the Regulators rules and regulations for running a tuition center. This case is ongoing and will not be resolved prior to the audit report being signed. The matter is disclosed as a contingent liability.
(4 marks)

ii) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is GH¢2·5 million and the element charged to land is GH¢2 million.
(4 marks)

iii) Lexon Institute’s computerised purchases is backed up daily, however for a period of three months the purchases records and the back-ups have been corrupted, and therefore cannot be accessed. Purchases for these three months amounted to GH¢4m.
(4 marks)

Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.

(Total: 15 marks)

Answer

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Tags: Audit report, Contingent Liability, Financial Reporting, IAS 37, Lawsuit
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

Question

At a meeting to discuss the draft accounts with senior management of Good Old Days Ltd, the external auditors, Gelian Chartered Accountants, asked management to confirm the amount of contingent liability of GH¢100 million in respect of a pending legal suit against the company. The CEO quizzed the chief accountant to explain how the amount of GH¢100 million was arrived at.

Required:
i) Describe briefly what a contingent liability is, giving examples where appropriate. (2 marks)
ii) Explain in detail the audit procedures for the verification of contingent liabilities. (5 marks)

Answer

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Tags: Audit Procedures, Contingent Liability, Legal claims, Verification
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2017

AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

Question

Logistics Ltd is a logistics and freight forwarding company based in the port city of Takoradi, and you are the Audit Manager in charge of the year-end audit. The draft financial statements show a profit before tax of GH¢2.6 million and total assets of GH¢18 million.

In your discussion with management, the following issues came up:

i) Management informed you that due to the ongoing coronavirus pandemic, shipping from China has slowed down considerably, and as a result, many employees have been laid off. A redundancy provision of GH¢220,000 is included in the draft financial statements. The audit review and calculations confirmed that the redundancy provision should be GH¢450,000. The Finance Director is, however, not willing to adjust the draft financial statements. (5 marks)

ii) An employee has filed a wrongful dismissal lawsuit against Logistics Ltd for GH¢1.2 million. This case is ongoing and will not be resolved before the Auditor’s report is signed. The matter is disclosed as a contingent liability. (5 marks)

Required:
Discuss each of the issues and describe their impact on the Auditor’s report, if any, should these issues remain unresolved in terms of ISA 705 (revised); Modification of the Auditor’s Opinion.

Answer

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Tags: Audit report, Contingent Liability, IAS 37, ISA 705, Redundancy Provision
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2021

AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

Question

a) Aseye Ltd is in the manufacturing sector and its year-end is 30 September 2019. The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed on 10 November 2019. Revenue for the year is GH¢80 million and profit before taxation is GH¢9 million. Subsequent to the year-end, a lawsuit was filed against Aseye Ltd. Below are the details of the lawsuit:

A key supplier of Aseye Ltd is suing the company for breach of contract. The lawsuit was filed on 10 October 2019, and the sum claimed by the supplier is GH¢2 million. This has been disclosed as a contingent liability in the notes to the financial statements; however, correspondence has just been received from the supplier indicating that they are willing to settle the case for a payment by Aseye Ltd of GH¢1 million. It is likely that the company will agree to this.

Required:
i) For the event above:

Discuss whether the financial statements require amendment. (2 marks)
Describe audit procedures that should be performed to enable the Auditor to draw a conclusion on the amendment. (2 marks)

ii) Describe the auditor’s responsibility for subsequent events occurring between:

The year-end date and the date the auditor’s report is signed. (3 marks)
The date the auditor’s report is signed and the date the financial statements are issued. (3 marks)

Answer

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Tags: Audit Procedures, Contingent Liability, IAS 37, ISA 560, Subsequent Events
Level: Level 2

Topic: Completion Procedures and Reporting
Series: APR 2022

AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

Question

You have recently been promoted to Senior Manager of Life Matters and Associates, a firm of Chartered Accountants. As part of your job description, you are to handle two clients in a given month. Below are some issues you will be faced with during the audit of these clients. The financial year-end for each client is 30 September 2020.

You are reviewing the Audit Senior’s draft auditor’s reports for the two clients, Factory Co Ltd and Toys Co Ltd.

Toy Co Ltd

The Audit Senior suggests that Toys Co Ltd’s audit opinion should not be qualified but should include an emphasis of matter paragraph after the audit opinion to highlight the situation below:

In October 2020, a legal claim was filed against Toys Co Ltd by a toy retailer. The suit was from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements. Audit working papers also provided sufficient evidence that no provision is necessary as Toys Co Ltd’s lawyers have stated in writing that the likelihood of the claim succeeding is remote. The amount of the claim is fixed and is adequately covered by cash resources.

Factory Co Ltd

Factory Co Ltd, a listed company, permanently closed several branches in May 2020, with all closure costs finalised and paid in August 2020. The said branches all produced the same items, which contributed 10% of Factory Co Ltd’s total revenue for the year ended 30 September 2020 (2019 – 23%). The closure has been discussed accurately and fully in the Chairman’s statement and Directors’ Report. However, the closure was not stated in the notes to the financial statements nor separately disclosed on the financial statements.

The audit senior has proposed an unmodified audit opinion for Factory Co Ltd as the matter has been fully addressed in the Chairman’s statement and Directors’ Report.

Required:

a) Evaluate whether the Audit Senior’s draft auditor’s report is appropriate, and where you disagree, recommend the amendment necessary to the draft auditor’s report of:

i) Toy Co Ltd (4 marks)

ii) Factory Co Ltd (6 marks)

b) Assuming the auditors of Life Matters and Associates are contemplating whether to use an emphasis of matter paragraph and other matter paragraph in the audit report, explain both options and the situations when each is relevant. (10 marks)

Answer

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Tags: Audit opinion, Auditor's Report, Contingent Liability, Emphasis of Matter, Other Matter Paragraph
Level: Level 3

Topic: Reporting, The audit approach
Series: MAY 2021

AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

Question

The matter is disclosed in the draft financial statements in a note, as a material contingent liability.

Required:

Advise if the audit opinion should be unmodified, and if so, should the report contain a ‘Material Uncertainty Related to Going Concern’ paragraph? (3 Marks)
Discuss the form and content of a modified auditor’s report. (7 Marks)

Answer

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Tags: Contingent Liability, Financial Statement Disclosure, Legal Claim, Modified Auditor’s Report, s: Audit Opinion
Level: Level 3

Topic: Audit Reporting
Series: MAY 2024

FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

Question

Required:
Explain Contingent Liability and Contingent Asset as used in the statement above.
(Total: 3 marks)

Answer

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Tags: Contingent Asset, Contingent Liability, Disclosure, Financial Reporting, IAS 37
Level: Level 2

Topic: contingent liabilities and contingent assets
Series: JULY 2023

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

Question

Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.

(Total: 15 marks)

Answer

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Tags: Audit report, Contingent Liability, Financial Reporting, IAS 37, Lawsuit
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

Question

Answer

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Tags: Audit Procedures, Contingent Liability, Legal claims, Verification
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2017

AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

Question

In your discussion with management, the following issues came up:

Answer

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Tags: Audit report, Contingent Liability, IAS 37, ISA 705, Redundancy Provision
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2021

AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

Question

Required:
i) For the event above:

Discuss whether the financial statements require amendment. (2 marks)
Describe audit procedures that should be performed to enable the Auditor to draw a conclusion on the amendment. (2 marks)

ii) Describe the auditor’s responsibility for subsequent events occurring between:

The year-end date and the date the auditor’s report is signed. (3 marks)
The date the auditor’s report is signed and the date the financial statements are issued. (3 marks)

Answer

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Tags: Audit Procedures, Contingent Liability, IAS 37, ISA 560, Subsequent Events
Level: Level 2

Topic: Completion Procedures and Reporting
Series: APR 2022

AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

Question

You are reviewing the Audit Senior’s draft auditor’s reports for the two clients, Factory Co Ltd and Toys Co Ltd.

Toy Co Ltd

The Audit Senior suggests that Toys Co Ltd’s audit opinion should not be qualified but should include an emphasis of matter paragraph after the audit opinion to highlight the situation below:

Factory Co Ltd

The audit senior has proposed an unmodified audit opinion for Factory Co Ltd as the matter has been fully addressed in the Chairman’s statement and Directors’ Report.

Required:

a) Evaluate whether the Audit Senior’s draft auditor’s report is appropriate, and where you disagree, recommend the amendment necessary to the draft auditor’s report of:

i) Toy Co Ltd (4 marks)

ii) Factory Co Ltd (6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit opinion, Auditor's Report, Contingent Liability, Emphasis of Matter, Other Matter Paragraph
Level: Level 3

Topic: Reporting, The audit approach
Series: MAY 2021

Question Tag: Contingent Liability

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AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

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Question Tag: Contingent Liability

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AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

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FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

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AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

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AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

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AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

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AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

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AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

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AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

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FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

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AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

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AA – May 2017 – L2 – Q4b – Audit and Assurance Evidence

Explanation of a contingent liability and audit procedures for its verification.

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AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

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AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

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AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

You're reporting an error for "AAA – May 2021 – L3 – Q3 – Reporting | The audit approach"

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