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Question 16-1

What meant by a contingency? Give four example of contingency


Contingency is liabilities that are uncertain because of the possible outflow
resources from the entity will ultimately be resolved when some future event
occurs or fails to occur. The examples of contingencies including:
-

pending or threatened litigation,


income tax disputes,
product warranties or defect and
actual or possible claims and assessments.

Question 16- 2
What information does the auditor ask the lawyer to provide on pending or
threatened litigation?
The auditor will prepared a letter of inquiry, referred to as a legal letter, sent to
the lawyer to obtain corroborating evidence regarding litigation, claims and
assessments and auditor shall seek direct communication with the lawyer if the
auditor assesses a risk of material misstatement regarding litigation or claims
that have been identified. The auditor may request information about a number
of items, including:
-

a list of pending or threatened litigation,


a request that the lawyer describes and evaluates each pending or
threatened litigation
A request that the lawyer indicates if his or her response is limited in any
way.

Question 16-3
Provide two examples of commitments. Under what conditions may such
commitments result in the recognition of a loss in the financial statement?
Companies often enter long-term commitments and the examples of
commitment are to purchase raw material or sell their product at a fixed price.
For example, an airline might commit to purchase its jet fuel from a supplier at a
predetermined price over a given time period. Long term commitments are
usually identified through inquiry of client personnel during the audit of the
revenue and purchasing processes and through review of the minutes of board
meeting. accounting standards on derivatives and hedging require such
commitments to be disclosed in a note to the financial statements with an
adjustment to Other Comprehensive Income (OCI) for any gain or losses.

Question 16-11
What categories of items should be included in the auditors communication with
those charged with governance? Give two examples of each category.
The items to be communicated are organized into three categories: the auditors
responsibilities under auditing standard, an overview of the planned scope and
timing of the auditor and significant findings of the auditor. The examples of
significant findings from the audit are:
-

uncorrected misstatements
Identified fraud or information that indicated fraud.

Next are the example of an overview of the planned scope and timing of the
audit are:
-

the auditors approach to internal control relevant to the audit and


the application of the concept of materiality in the context of an audit.