On February 12, 2016 as you are in the final stages of your audit of the ABC com
ID: 2493941 • Letter: O
Question
On February 12, 2016 as you are in the final stages of your audit of the ABC company you receive Mike, Ben, and Harry`s response to your letter of audit inquiry. The last paragraph of the lawyers` response states:
“This response is limited by, and in accordance with, the ABA Statement of Policy Regarding Lawyers` Response to Auditors` Requests for Information (Dec 1975); without limiting the generality of the foregoing, the limitations set forth in such Statement on the scope and use of this response (Paragraph 2 and 7) are specifically incorporated herein by reference, and description herein of any “loss contingencies” is qualified in its entirety by Paragraph % of the Statement and the accompanying Commentary (Which is an integral part of the statement) The ABC company will inform you whenever it believe that there is an unasserted possible claim or assessment that may call for financial statement disclosure and will consult with you concerning the question of such disclosure and the applicable requirements of FASB Accounting Standards Codification Section 450 ( statement of financial accounting standards #5) As of Dec 31, 2015, the ABC company owed us 200,000 for legal services, of which 45,000 had been billed as of that date.”
A. What, if anything, would you tell him he (and you) should do with respect to the Dec 31, 2015 financial statement?
B prepare any Necessary Adjusting Journal entries.
Explanation / Answer
Disclose the existence of the contingent liability in the notes accompanying the financial statements as now the remaining liability is reasonably possible but not probable as $45000 has been actual expense incurred, so now liability is probable, but you cannot estimate the amount. “Reasonably possible” means that the chance of the event occurring is more than remote but less than likely.
Dec #1, 2015 Legal Expense a/c Dr $45000
Accrued Liabilities $45000
(Being expenses recognized so is actual liability)
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