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P9-7 pg.504

This article discusses different situations faced by auditors and whether they should report a liability on the balance sheet, disclose a contingent liability, or not report the situation. The decisions are justified and explained for each scenario.

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P9-7 pg.504

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  1. P9-7 pg.504 Arash Foroudi Julio Perez Becky Truax Ken Chen Michael English

  2. Making a Decision as an Auditor: Contingent Liabilities For each of the following situations, determine whether the company should (a) report a liability on the balance sheet, (b) disclose a contingent liability, or (c) not report the situation. Justify and explain your conclusions.

  3. Number 1 An automobile company introduces a new car. Past experience demonstrates that lawsuits will be filed as soon as the new model is involved in any accidents. The company can be certain that at least one jury will award damages to people injured in an accident. C- Don’t report the situation

  4. Number 2 A research scientist determines that the company’s best selling product may infringe on another company’s patent. If the other company discovers the infringement and files suit, your company can lose millions. C- Don’t report the situation

  5. Number 3 As part of land development for a new housing project, your company has polluted a natural lake. Under state law you must clean up the lake once you complete development. The development project will take five to eight years to complete. Current estimates indicate that it will cost $2 to $3 million to clean up the lake. A- Report a liability on the balance sheet.

  6. Number 4 Your company has just been notified that it lost a product liability lawsuit for $1 million that it plans to appeal. Management is confident that the company will win on appeal, but the lawyers believe that it will lose. B- Disclose a contingent liability.

  7. Number 5 A key customer is unhappy with the quality of a major construction project. The company believes that the customer is being unreasonable but, to maintain goodwill, has decided to do $250,000 in repairs next year. A- Report a liability on the balance sheet.

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