AWP 8

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Disclosure Case Example: Contingent Liabilities from Ongoing Litigation

Context

ABC Manufacturing Company is currently involved in several legal cases that may result in significant financial obligations. These contingent liabilities must be disclosed in the financial statements according to the applicable accounting standards, as they could have a material impact on the financial position and performance of the company.

Audit Objective

To verify that ABC Manufacturing Company has appropriately disclosed all contingent liabilities related to ongoing litigation in its financial statements, in line with the relevant accounting standards.

Types of Audit Evidence and Documentation for Disclosure

1. Review of Legal Documents and Correspondence

• Case: Auditors review legal documents, correspondence with legal counsel, and minutes of board meetings discussing the litigation.

• Documentation: Documentation includes summaries of key legal cases, the company’s potential exposure, and the basis for any provisions or disclosures made. Legal opinions supporting the accounting treatment and disclosure decisions are also filed.

2. Inquiries of Management and Legal Counsel

• Case: Conduct detailed inquiries with management and the company’s legal counsel regarding the status of ongoing litigation and its potential impact.

• Documentation: Summarize the inquiries made, responses received, and any additional information provided by legal counsel, including their assessment of the outcomes and financial impacts.

3. Assessment of Disclosure Adequacy

• Case: Compare the company’s disclosures regarding contingent liabilities to the requirements of the applicable accounting standards (e.g., IAS 37 for International Financial Reporting Standards users).

• Documentation: Prepare a memo that evaluates the completeness and accuracy of the disclosures against the standard requirements, noting any deficiencies or areas for improvement.

4. Review of Draft Financial Statements

• Case: Review the draft financial statements to ensure that all required disclosures regarding contingent liabilities have been included and are clearly presented.

• Documentation: Document the review process, including a checklist of required disclosures, the location of disclosures in the financial statements, and any recommendations made to management for revision.

5. Management Representations

• Case: Obtain written representations from management confirming their belief that all contingent liabilities have been adequately disclosed in the financial statements.

• Documentation: Include the representation letter, highlighting sections related to the disclosure of contingent liabilities and any assurances or explanations provided by management.

6. Audit Committee Communication

• Case: Communicate with the audit committee or those charged with governance about the adequacy of disclosures related to contingent liabilities, especially if significant risks or uncertainties are involved.

• Documentation: Document the communications, including any concerns raised, discussions held, and the audit committee’s responses or actions taken as a result.

Conclusion

For disclosure, specifically concerning contingent liabilities from ongoing litigation, auditors collect and document evidence to ensure that ABC Manufacturing Company has provided all necessary information in its financial statements. This evidence supports the auditors’ opinion on the financial statements, confirming that disclosures are complete, accurate, and in accordance with the applicable accounting standards. Through detailed documentation, auditors provide a basis for their conclusions on disclosure adequacy, contributing to the transparency and reliability of the financial reporting process.