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Accounting: Contingency

What is one contingency that would concern an auditor and how would the auditor become aware of this contingency?

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Hello Student,

Before you answer this question the first thing you may want to note is, "what really is a contingency?" SFAS 5, Accounting for Contingencies, defines a contingency as, "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur." Typical examples of gain contingencies include possible receipts of monies from gifts, donations, and bonuses; possible refunds from the government in tax disputes; pending court cases with a probable favorable outcome; and/or tax loss carry forwards. Such gains are not be recorded by companies and are only to be "disclosed" if the probability of receiving it is high.

As it relates to contingency losses, typical examples include litigation, claims, and assessments; guarantee and warranty costs; premiums and coupons; and/or environmental liabilities. Such losses are normally recorded - however, there are certain factors which must be considered in determining for example, whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments. Based on the question you have been asked to answer such factors will not be discussed here. ...

Solution Summary

This solution provides you with information as to what a contingency is; examples of gain and loss contigencies; in addition to procedures that auditors must follow in order to become aware of whether or not contingencies exist within a firm. The solution is adequately referenced.