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Being an auditor you are required to identify five difficulties (with proper justification and detail) that you can foresee in getting sufficient audit evidence for provisions, contingent assets and liabilities during the audit of both the companies.
Auditing papers will have to gain an understanding of how subsequent events (also known as ‘events after the reporting period’) affect the financial statements of an entity.
Verification of the individual assets and liabilities by the auditor extends into the post balance sheet period (i.e. the period between the year end date and the date of approval of the financial statements). The auditors will use this to their advantage when seeking to verify amounts stated for contingent liabilities, and for post balance sheet events. Provisions, Contingent Liabilities and Contingent Assets at the year-end. In this case, the financial statements will require adjusting because:
1. The enterprise has a present obligation as a result of a past event.
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
3. A reliable estimate can be made of the amount of the obligation.
Management would disclose all contingent liabilities, provisions and contingent Assets to their auditors. This doesn't always happen and auditors should perform extended search procedures after an initial inquiry. Auditors can review any company Internal Revenue Service reports for unsettled income tax liabilities. It's also helpful to search the board of director meeting minutes for discussion of potential or current lawsuits. Auditors should pay special attention to the content of any legal expense accounts in the accounting system. The supporting documentation for legal expense transactions may reveal contingent liabilities.
To determine the correct accounting treatment, auditors must evaluate the materiality of the contingent liabilities, provisions, contingent assets. Before examining the specifics of the provisions, contingent assets and contingent liabilities, auditors will determine a dollar amount they consider significant based on the company's financial situation.
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