If the Auditor Concludes That There Are Contingent Liabilities, He

question 69

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) Frequently, the CPA firm obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys.
• D) Answers B and C are correct, but answer A is not.

---

Definitions:

Service Contract

An agreement between a service provider and a customer to deliver specified services over a set period.

Adjusting Journal Entry

A bookkeeping adjustment recorded at the end of an accounting period to allocate income and expenses to the period in which they actually occurred.

Liability Insurance

Insurance coverage that protects against claims arising from injuries or damage to other people or property.

Prepaid Insurance

The portion of an insurance premium that has been paid in advance and is recognized as an asset until it is consumed over time.