Two Separate Discussion Questions

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Xnegre

Business Finance

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Question 1

Mary Smith, CPA, has completed the audit of notes payable and other liabilities for Red Fox Ranch and now plans to audit for contingent liabilities and commitments.

  • Distinguish between contingent liabilities and commitments and explain why both are important in an audit.
  • Identify three useful audit procedures for uncovering contingent liabilities that Smith will likely perform in the normal conduct of the audit, even if she has no responsibility for uncovering contingencies.
  • Identify three other procedures Smith is likely to perform specifically for the purpose of identifying undisclosed contingencies to help her obtain evidence about the completeness presentation and disclosure objective.
  • Identify three useful audit procedures for uncovering commitments that Smith will likely perform as part of the audit of other accounts.

Question 2

Explain how an examination of prospective financial statements differs from a compilation of prospective financial statements. Describe the activities involved in an examination of prospective financial statements.

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Explanation & Answer

Attached.

Running Head: RED FOX RANCH

1

Red Fox Ranch
Name
Course
Tutor
Date

RED FOX RANCH

2

Question 1

Distinguish between contingent liabilities and commitments and explain why both are
important in an audit.

A contingent liability is a potential future obligation to an external or outside party for an
unknown sum from undertakings that have already occurred. For example, income tax dispute,
pending litigations, product warranties, lawsuit, income tax warranties, and notes receivable
discounted are examples of contingent liabilities. A pending lawsuit or product warranties could
result in a considerable amount of payout in the future. Commitment refers to an agreement
between two parties to assume a specific financial obligation until a future date. It also applies to
an agreement that a given entity will comply with a fixed set of requirements in the future
notwithstanding what happens to the status of profits or economy as a whole (Hemming, 2006).

Contingent liabilities and commitments are necessary for an audit because they represent
risks that are easily dismissed or misunderstood. They impose high risks and increased frequency
with which they happen in contemporary finance thus they should be taken into account by the
government or private auditors. Failure to include contingent liabilities and commitments in the
financial statements m...


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