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    Audit: Contingent Liabilities

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    Management will typically have a conservative view on contingencies and be hesitant to report them in the financial statements. They may feel that the disclosure of contingencies could lower stock prices and lead to lawsuits. As an auditor, you should look for contingencies and make sure they are properly reported. The proper accrual or disclosure of contingencies supports transparent reporting and could reduce the possibility of lawsuits from investors and creditors by providing them with realistic expectations.

    A number of companies have pending lawsuits or other contingent liabilities reported in their financial statements.
    Search the EDGAR database to find a 10-K that reports a contingent liability. Write a paragraph summarizing one of the liabilities found in the financial statements. Did the company disclose the liability in the footnotes only, or did it recognize the liability in the financial statements?

    What procedures might the auditors use to search for the contingent liabilities listed in part (1)? Explain the steps in the procedure in detail, as well as how they would provide the outcome desired.

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    Solution Preview

    In CVS's 2016 annual report, they have a footnote on commitments and contingencies where they discuss a number of contingent liabilities (footnote 11). One of these contingencies is the guarantee of leases for a former subsidiary, Bob's Stores. Bob's stores has filed bankruptcy and if they are unable to pay their landlord under the leases CVS guaranteed, CVS would be liable to pay the lease costs under their guarantee. The assets of Bob's have been approved to be sold by the bankruptcy court and CVS is hopeful that the new owner will be able to pay the leases and avoid having to make ...

    Solution Summary

    A discussion on contingent liabilities is complemented by a picture of the balance sheet. CVS 2016 annual report used.