Material Loss Contingencies Should Be Recorded in the Financial Statements

question 44

Multiple Choice

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows:

• A) If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
• B) If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
• C) If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
• D) If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

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Definitions:

Common Sized Statements

Financial statements that present all items in percentage terms, with balance sheet items shown as a percentage of total assets and income statement items as a percentage of total revenue.

Cash Flows

The aggregated financial movements into and out of a venture, significantly affecting its availability of liquid assets.

Ratio Analysis

A quantitative analysis of information contained in a company's financial statements, used to evaluate the performance, liquidity, and solvency of the business.

Financial Position

A snapshot of a company’s financial condition at a specific moment in time, encompassing assets, liabilities, and equity.