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Running head: DISCUSSION QUESTION

Discussion question

Name

Institution
 DISCUSSION QUESTION

QUESTION ONE

Part 1

Contingent liability refers to the liability that have potential of occurring due to future

obligations that is to be paid to another unknown party outside of the organization. Because it

involves uncertain occurrence, the obligation amount is also uncertain. Both the occurrence and

the amount of the liability are uncertain. However, if the two conditions are not met, then it can

be described as being actual liability rather than contingent liability. Commitment liability refers

to an agreement that sets forth conditions that are fixed and which the company should commit

itself to achieve in future time irrespective of the condition or profitability of the firm.

Commitment is not going to be affected by external or internal factors operating outside or

within the organization.

Commitments and contingent liabilities are both important elements to the users of the

financial statements especially for creditors and investors. They affect the potential amount of

resources that will be present in the future and will affect the cash flows available to investors

and creditors. Most accepted accounting principles prefer that commitments and contingent

liabilities be disclosed accurately. They are very important information in the analysis of

financial statements. Auditors should take the initiatives to accurately assess and discover the

disclosure and existence of such items that will ensure the compliance of the accounting

principles including the Generally Accepted auditing standards.

Part two

The three useful audit procedures include the following

 DISCUSSION QUESTION

Analyze and review shareholders board of director’s minutes of meetings that are

available.

Confirm both the unutilized and utilized balances available within the lines of credit

Review the income tax reports settlements that are available with compliance agencies

Part three

Three other procedures include:

Get access to the information that is relevant to the subject by making management

enquiries.

Evaluate the legal expenses incurred by proper analysis to determine the availability of

contingent liabilities that may occur in the future.

Ensure necessary information extraction from litigation that may relate to the existence

and status of contingent liabilities while working in conjunction with law firms. Ensure proper

coordination with law firms for exhaustive investigation and analysis.

Part four

Three useful audit procedures

To make substantial enquiries in relation to the review of financial statements of

important affiliates and in cases with identifiable related party transaction. One must make

enquiries directly to the related affiliated management and do extensive examination of such

affiliate records.

All stock transactions should be analyzed while confirming the details with the registrar

and the agent’s transfer that are involved. A thorough review of all records should be done to

identify unusual journal entries in the coming periods before end of the year.
 DISCUSSION QUESTION

All interests payment should be accurately be assed and specific discussion carried out in

relation to the party transactions with management and the same included in the representation to

the management.

QUESTION 2

Compilation differs from examination in the following ways. In examination of the

financial statements, it is not the responsibility of the practitioner to prepare for the financial

statements. Also in examination, the role of the practitioner is limited to reporting and evaluation

of the financial statements. The examination of the prospective financial statement involves a

number of activities such as evaluating the major assumptions, appraising the preparations done

for the forthcoming financial statements. It also ensures the financial statements are prepared in

accordance with presentation guidelines found in AICPA. Finally a fully examination report

should be issued.