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SNHU Company Disclosing Contingent Liabilities Discussion Responses

SNHU Company Disclosing Contingent Liabilities Discussion Responses


i need a response :

According to the information presented in the 10K report, it takes a contingent liability approach and routinely evaluates legal actions and other contingencies. The information demonstrates that the liability is stated in the footnotes. Still, it suggests that the corporation modifies accruals and disclosures as needed. They also state that they may only disclose loss estimates in cases where they can estimate the damage, or it is irrelevant. This suggests that the corporation may recognize liabilities in the financial statements and provide contingency information in the footnotes, depending on their nature and materiality (AMZN, 2023). They periodically assessed the situation, weighed liability, and published relevant information in their financial statements. This strategy is transparent and accountable since Amazon recognized the uncertainty and serious impact this legal action could have on their operating performance and cash flows. The district court’s summary judgment ruling in Amazon’s favor showed the necessity of careful evaluation, disclosure, and defense in contingent liability cases. 

In searching for the contingent liabilities of the company, the auditors could begin by analyzing the company’s board of director meeting minutes. Reviewing meeting minutes will help to see if any conversations or decisions were made about lawsuits, legal claims, or other contingent liabilities. This is significant because it shows management’s awareness of these issues and their strategies to address them. Auditors also examine the company’s accounting system’s legal expense accounts. Auditor examination of these accounts can reveal legal fees, indicating contingent liabilities (Kang et al., 2019). This method entails examining individual transactions for legal issues. Auditors also analyze legal expense transaction documents to support this analysis. This documentation may contain law firm invoices, legal correspondence, settlement agreements, and other pertinent information. This phase verifies expenses and legal occurrences. These methods should thoroughly identify and assess contingent liabilities. Auditors can understand the company’s legal situation by carefully analyzing board minutes, legal expense accounts, and supporting paperwork. This helps financial statements reflect these contingencies’ possible impact.

#1-need a response for this one below original info for it above

We cannot agree more with you when you stated that: “The information demonstrates that the liability is stated in the footnotes” Even though, management of companies grapple with the need to disclose or accrue loss contingencies, management is required to acknowledge all known contingent liabilities to the auditor. Nevertheless, materiality is key in the auditing of contingencies. What do you think?

#2- A contingent liability refers to a current situation or a specific set of conditions characterized by uncertainty regarding a potential loss. This loss will eventually be resolved based on the occurrence or non-occurrence of a future event (Messier, et. al., 2017). Contingent liabilities are typically disclosed in situations involving ongoing legal actions. In instances of legal proceedings, a company’s potential losses are uncertain, leading the company to determine how to record such contingent liabilities. According to FASB ASC Topic 450, a contingent liability arises when there is a high likelihood of incurring a loss, and this loss can be reasonably approximated (Deloitte, n.d.).

The company examined in this discussion is T-Mobile, which in its 2022 10-K report it is reported that it is engaged in a variety of legal disputes, claims, investigations by government agencies, and enforcement actions, as well as other proceedings (“Legal and Regulatory Matters”) that arise as part of our regular business operations. These matters include claims of patent infringement (often asserted by entities that hold patents but don’t actively use them and primarily seek financial compensation), class-action lawsuits, and processes aimed at upholding rules and regulations set by bodies like the FCC or other government agencies. These Legal and Regulatory Matters are in different phases, and some of them might progress to trial, arbitration, hearings, or other forms of resolution within the next 12 months. If these matters are not resolved through other means, they could lead to financial penalties, fines, or the granting of monetary or restraining remedies (T-Mobile, 2023).

There exist various protocols that the auditor must apply concerning potential obligations that might arise from ongoing legal disputes. The initial step involves the auditor “Inquiring of and discussing with management the strategies and processes established for recognizing, evaluating, and accounting for legal cases, claims, and evaluations,” as stipulated by the PCAOB (Public Company Accounting Oversight Board). This action establishes a foundation for the auditor’s expectations and highlights any potential gaps in the company’s current protocols.

Subsequently, the auditors should solicit from management an account and evaluation of legal disputes present on the balance sheet’s preparation. Given that the balance sheet is a snapshot in time, only disputes existing during the reporting period must be considered. This practice ensures that auditors only assess pertinent legal matters.

Next, the auditors should scrutinize any legal documents held by the client provided by lawyers in relation to legal disputes. This phase represents a deeper investigation where auditors assess whether the contingent obligation is likely and whether potential losses can be reasonably approximated, necessitating disclosure by the company.

Lastly, the auditors should be able to get confirmation from management that any unasserted claims suggested by legal counsel are likely to be made known. After executing these steps, an auditor will identify relevant legal disputes and ascertain the presence of contingent obligations that require disclosure. Such disclosure occurs if the likelihood of the obligation is high and the potential loss can be estimated with reasonable accuracy (Audit Procedures for a Contingent Liability, 2017).

#3- Contingent liability is a liability or a potential loss that may occur in future depending on the outcome of a specific event. According to the US GAAP if the possibility of occurrence is remote the company is not required to disclose nor accrue. If the chances of occurrence more than remote but less than probable (20-50%), the disclosure is required. If the chances of occurrence are probable and the contingency is steamtable it must be accrued and disclosed.

I reviewed Apple’s 10-K, who is a subject to various pending legal proceedings and claims, but they have not been disclosed. In the opinion of management, there was not at least a reasonable possibility the company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims.

As an auditor I would identify litigations, claims, and assessments involving the entity that may give rise to a risk material misstatement. As a part of the initial requirement, I would also obtain a written representation from management. I would also inquire to management as they are a primary source of information regarding contingencies, and discuss its procedures regarding identifying and evaluating litigation. The next step I would inspect minutes of meeting and correspondence between the entity and its external legal team. Also very important to obtain evidence of occurrence regarding subsequent events.

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