Question

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows:

1) If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
2) If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
3) If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
4) If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

Answer 1

Material loss contingencies are recorded on financial statements if the loss is probable and measurable. Auditor's reports can still be unqualified with disclosed but not recorded losses but may include an explanatory paragraph. If a loss cannot be estimated but is still probable, disclosure in the notes is sufficient for an unqualified opinion.

Step-by-step explanation:

The situation described relates to the treatment of material loss contingencies in financial statements and how they may impact an auditor's report. When assessing such contingencies, there are a few potential outcomes based on whether the loss is probable and can be estimated. If both conditions are met, the loss should be recorded on the financial statements. If the loss can be reasonably estimated but is only disclosed in the notes, the auditor can still issue an unqualified opinion; however, they should consider whether to add an explanatory paragraph to emphasize the matter. If a probable loss cannot be estimated reasonably, disclosure in the notes without recording in the financial statements is still compatible with an unqualified opinion, and no explanatory paragraph is necessarily required.