Discuss three audit procedures commonly used to search for contingent liabilities.

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Discuss three audit procedures commonly used to search for contingent liabilities.


Answer:

• Inquire of management (orally and in writing) about the possibility of unrecorded contingencies.
• Review current and previous years’ internal revenue agent reports for income tax settlements.
• Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits or other contingencies.
• Analyze legal expense for the period under audit, and review invoices and statements from legal counsel for indications of contingent liabilities.
• Obtain a letter from each major attorney performing legal services for the client as to the status of pending litigation or other contingent liabilities.
• Review audit files for any information that may indicate a potential contingency.
• Examine letters of credit in force as of the balance sheet date and obtain a confirmation of the used and unused balance.

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