24–26
a. A contingent liability is a potential future obligation to an outside party for an unknown amount
resulting from activities that have already taken place. The most important characteristic of a
contingent liability is the uncertainty of the amount; if the amount were known it would be included
in the financial statements as an actual liability rather than as a contingency
b. Audit procedures to learn
1. -Discuss the existence and nature of possible contingent liabilities with management and obtain
appropriate written representations
-Review the minutes of directors’ and stockholders’ meetings for indication of lawsuits or other
contingencies
-Analyze legal expense for the period under audit and review invoices and statements of legal
counsel for indications of contingent liabilities
-Obtain letters from all major attorneys performing legal services for the client as to the status
of pending litigation or other contingent liabilities
2. -Review the minutes of directors’ and stockholders’ meetings for indication of lawsuits or other
contingencies
-Confirm details of stock transactions with registrar and transfer agent
– Review records for unusual journal entries subsequent to year-end
-Obtain letters from all major attorneys performing legal services for the client as to the status
