Final answer:
The correct answer is B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment. Auditors continuously assess contingencies throughout the audit, requiring professional judgment and management cooperation to appropriately recognize and disclose these potential liabilities.
Step-by-step explanation:
When dealing with contingencies, B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment. Contingencies are potential liabilities that may occur depending on the outcome of an uncertain future event. As such, they are inherently uncertain and require management to make estimates and judgments about the likelihood and potential impact of these events.
The auditor's role is to assess whether management has appropriately recognized, measured, and disclosed these contingencies in the financial statements in accordance with the relevant accounting framework. This process often involves assessing complex judgments and estimates made by management, thus requiring the auditor to apply their own professional judgment.
Moreover, it is not always easy for the auditor to uncover contingencies without management's cooperation. Management is typically closer to the business and its operations, and hence has better access to the information needed to identify and evaluate contingencies. Without their cooperation, it can be very challenging for an auditor to discover all necessary information.
Finally, the review for contingent liabilities is a continuous process throughout the audit, not just at the beginning and the end. Auditors need to continually reassess and consider new information that may impact the recognition and disclosure of contingencies.