If the Auditor Concludes That There Are Contingent Liabilities, He

question 8

Multiple Choice

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true?

• A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability.
• B) Disclosure may be unnecessary if the contingency is highly remote or immaterial.
• C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys.
• D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.

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Definitions:

Asymmetric Information

Occurs when one party in a transaction has more or superior information compared to another, affecting decision-making.

Moral Hazard

A situation in economics and finance where one party takes more risks because another party bears the cost of those risks.

Auto Insurance

A policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident or other vehicle-related damages.

Precautions

Actions taken in advance to prevent potential undesirable outcomes or to minimize risks.