contingent liabilty or provision

“A provision is a liability of uncertain timing or amount”

So how do you audit liabilities?

Specifically for provisions you need also to consider the matter that creates the uncertainty … just to be sure that it really is uncertain

Same idea with contingencies … possible liabilities the outcome of which will only be determined by the occurrence or non-occurrence of some substantially uncertain future event not in the control of the company

What is there in that definition that deserves your specific attention?

The uncertain future event? The monetary value ascribed to the contingency? Are there any third parties that may be able to provide you with corroborating evidence? Have there been any subsequent events that may fix with greater certainty the amount or estimate in the client’s calculations? Have there been any articles in the newspapers (or on the radio or television) concerning this matter? How has this matter arisen out of the company’s control? Is this a corporate governance matter? Does it need reporting to the non-executive directors? Is it a KAM and, if so, have we treated it appropriately in our draft audit report? There really should be an appropriate paragraph in the Management Representation Letter too

But, Shafiq, you worry me! There is less than 2 weeks to go before your exam and you appear not to be able to dream up any method as to how you might approach an hypothetical issue that has confronted you during the course of an hypothetical audit

And rote learning is not the answer!

Let your imagination fly.

Ask yourself “How would I (what steps would I take to) confirm some matter that the client has told me? Would I look at the underlying provable facts, the monetary values, the possibilities of obtaining outside confirmations, the (potential) materiality of the uncertain liabilities, the possible repercussions on the wording of the audit report?”

There’s so much that you could bring in!

OK?