Question

Descibe the types of entries/issues that you would expect to be recorded as contingent liabilities. How would you scrutinize these bookings from the audit perspective?

Answer 1

The entry or issue to be recorded as contingent liability is completely dependent on the nature of the transaction. As the liability becomes contingent based on the future outcome of a particular event which on present day is not contingent.

From the audit perspective these entries/issues can be recorded as contingent only if the contingency is probable and the amount of liability can be reasonably estimated.

Few of the examples are; lawsuit filed by a rival company for the potential patent infringement. Now if the management thinks that if is a strong case and the rival might win in the court then the auditor record it as the contingent liability as it is probable and can be reasonably estimated.

another example can be a manufacturing firm which has warranty on their products that can be returned under warranty provision but cannot be estimated to the extent.