Question

What is a loss contingency?

A. An existing condition or situation involving uncertainty to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.
B. An opinion expressed by the auditor when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
C. Lack of confidence in the audit process that intended users place in the financial statements.
D. A statement in the auditor's report that is required by generally accepted auditing standards.

Answer 1

A loss contingency is an existing condition involving uncertainty of a potential loss, which will be resolved by future events. It requires proper assessment for financial reporting, where probable and estimable losses must be recorded as liabilities, and others must be disclosed in financial statement notes.

Step-by-step explanation:

A loss contingency is defined as A: An existing condition or situation involving uncertainty to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. In the realm of accounting and business, this refers to a potential loss that may occur, depending on the outcome of a future event, such as a lawsuit, an environmental clean-up, or other uncertain situation. The uncertainty revolves around both the likelihood of the loss and the amount that would be lost if the event occurs.

Companies must assess the probability and estimate the amount of the loss to determine whether it should be reported on the financial statements. If the loss is considered probable and the amount can be reasonably estimated, the company is required to record a liability and the loss in its financial statements. If only one of these conditions is met, disclosure of the loss contingency is required in the notes to the financial statements.