Litigation, Claims & Assessments

Question 1

what are the GAAP rules* for a remote loss contingency?
*1. chance of event
2. disclose
3. accrue
4. range of values?

Answer 1

1. unlikely to occur
2. NO
3. NO
4. NA

Question 2

what are the GAAP rules* for a reasonably possible loss contingency?
*1. chance of event
2. disclose
3. accrue
4. range of values?

Answer 2

1. more than remote but less than probable
2. YES
3. NO
4. Disclose full range

Question 3

what are the GAAP rules* for a probable and estimable loss contingency?
*1. chance of event
2. disclose
3. accrue
4. range of values?

Answer 3

1. likely to occur
2. YES
3. YES
4. Accrue most probable amount or lowest amount in range

Question 4

what are the GAAP rules* for a probable and not estimable loss contingency?
*1. chance of event
2. disclose
3. accrue
4. range of values?

Answer 4

1. likely to occur
2. YES
3. NO
4. Disclose full range

Question 5

primary source of obtaining evidence

Answer 5

attorney letter

Question 5

Unfavorable judgment from litigation must be ________________ to accrue a loss contingency

Answer 5

probable and estimable

Question 6

secondary source of obtaining evidence

Answer 6

1. board minutes
2. review contracts, loan agreements, leases
3. guarantees from bank confirmation forms

Question 7

GAAP rules for a loss contingency require _______ when it is ________ that the client will pay some type of monetary settlement

Answer 7

footnote disclosures

reasonably possible

Question 8

auditor will seek clarification of the expected damages to ensure loss contingency is properly recorded because…

Answer 8

the action requires a monetary settlement that can be estimated

Question 9

audit committee communication _____ reference what management has done

Answer 9

DOES NOT

think “we” in management representation letter

Question 10

if the total loss contingency is greater than materiality for the F/S as a whole, auditor will require client to record liability. it is disclosed without accrual either when:

Answer 10

1. reasonably possible (not probable) that legal action will result in a settlement
   OR 2. if the settlement amount cannot be reasonable estimated

Question 11

Attorney letters should be dated

Answer 11

As close to the audit report date as possible