What is the importance of contingent liabilities in an audit

Do you know what it is and what importance of contingent liabilities in an audit?

Fundamental part of the statements and accounting analyzes, the contingent liability can become a major problem when ignored.

In this content, the Audilink presents the concept and importance of contingent liabilities in accounting audits. Continue reading to know more!

What are contingent liabilities?

so that we can understand the concept of contingent liabilities, we need to consider what the < Strong> CPC 25 , check out:

"contingent liabilities is:

(a) a possible obligation resulting from past events and whose existence will be confirmed only by the occurrence or not one or more uncertain future events not totally under the entity control; or

(b) a gift obligation resulting from past events, but that is not recognized because:

(i) is not likely that an outflow of resources incorporating economic benefits is required to settle the obligation; or

(ii) The value of the obligation can not be measured with sufficient reliability. "

What is the importance of contingent liabilities? According to accounting standards, contingent liabilities may develop in a non-initially expected manner. Therefore, they should be periodically evaluated.

Only periodic assessments can determine whether an outflow of resources incorporating economic benefits has become likely.

In addition, the CPC 25 determines that:

"30. If a future economic benefits will be required for an item previously treated as a contingent liability, the provision must be recognized in the financial statements of the period in which the change occurs In the estimation of probability (except under extremely rare circumstances where no sufficiently reliable estimate can be done). "

As the contingent liabilities should be disclosed

Contingent liabilities are of interest to stakeholders and should be disclosed by companies on their swings as proof of good faith and transparency of demonstrations.

In practice, contingent liabilities do not appear in the balance sheet, but should be disclosed through explanatory notes.

In view of this, unless remote the possibility of any disbursement in liquidation, companies must disclose, for each class of contingent liabilities on the balance sheet date, a brief description of its nature, and when possible:

• the estimation of its financial effect;
• the indication of uncertainties related to the value or time of occurrence of any output; and
• The possibility of any refund.

  Example of contingent liabilities

  A good example of contingent liabilities are judicial disputes, such as labor causes, civil, tax or environmental, among others.

  In the case of the processes that run within the judiciary, organizations can understand that there is a relevant risk of loss of action and losses related to possible fines and indemnities, that is, an uncertain liability, and therefore considered a contingent.

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