Identifying liabilities not given appropriate accounting treatment

Search for Unrecorded Liabilities

To identify unrecorded liabilities, the auditor performs the following:

 Reviewing subsequent cash disbursements
- Best source of corroborating evidence
 Test of unprocessed invoices or open purchase orders
 Analytical procedures that may indicate understatements of liabilities

Litigation and Claims

Level of Uncertainty Is it reliably measurable?

Yes Provision
Probable
No Disclosure
Yes
Possible Disclosure
No
Yes
Remote Ignore
No

The auditor shall design and perform procedures in order to become aware of any litigation and
claims which may give rise to risk or material misstatements.

Procedures:
 Inquiry (management, BOD, in-house legal counsel
 Analytical Procedures (legal expense, professional fees)
 Inspection (minutes of meetings, correspondence, details of legal expense accounts and related
source documents)
 Use any information obtained regarding the entity’s business

When the auditor believes or had identified that litigation or claims exist, the auditor shall:
 Seek direct communication with the entity’s legal counsel
- Confirmation

Management prepares and signs letter of inquiry see notes

 Meet with the entity’s legal counsel when:

a. The auditor determines that the matter is a significant risk
b. The matter is complex
c. Disagreement between management and entity’s legal counsel exists
1. Assessment of ability to 2. Appropriateness of Going 3. Consideration of Material
continue as Going Concern Concern assumption Uncertainty

(for at least 12 months Disclose the following:

from the reporting date 1. Material Uncertainty
2. Mitigating factor, if any
If appropriate:
1. Present the FS using other
than Going Concern
assumption
2. Disclose the following:
 Fact X GC
 The other than GC
assumption used
 Reasons X GC