Audit: Contingent Liabilities

Management will typically have a conservative view on contingencies and be hesitant to report them in the financial statements. They may feel that the disclosure of contingencies could lower stock prices and lead to lawsuits. As an auditor, you should look for contingencies and make sure they are properly reported. The proper accrual or disclosure of contingencies supports transparent reporting and could reduce the possibility of lawsuits from investors and creditors by providing them with realistic expectations.

A number of companies have pending lawsuits or other contingent liabilities reported in their financial statements.
Search the EDGAR database to find a 10-K that reports a contingent liability. Write a paragraph summarizing one of the liabilities found in the financial statements. Did the company disclose the liability in the footnotes only, or did it recognize the liability in the financial statements?

What procedures might the auditors use to search for the contingent liabilities listed in part (1)? Explain the steps in the procedure in detail, as well as how they would provide the outcome desired.

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