Free Audit Case Study Examples

- The liability should be recognized in the balance sheet as a contingent liability. The amount may be ascertainable but when the liability could arise is not ascertained yet. Hence the balance sheet should contain an amount of contingent liability. The principle of conservatism shows that the future liability should be recognized. Since in the given case, the amount is material and significant, the liability should be shown as a contingent liability in the balance sheet.
- The amount is material to the financial statements. In the given case, the amount is quite significant and is required to be a part of the financial statements. Even if the amount does not consist of a large number, it should be included in the financial statements so as to read the statements in the correct manner. The principle of materiality states that any amount which is material to the financial statements should be included in the reports. The auditor is required to pay specific attention to the materiality concept and is required to disclose the amount which may be spent for the clean up procedures in the future.
- Additional evidence required from the entity are the documentation maintained by it at the time of purchase of the site. Additionally, the details regarding the production process and the pollution caused by it would be necessary. The entity will also be required to quantify the amount it may have to pay for the clean up of the area. Information about the usage of the site by the previous owner and the amount of pollution caused by it should also be gathered. The entity should be asked to produce details regarding the emissions made by it and the specific chemicals it uses at the site. Information should be gathered from the employees to confirm the facts provided by the entity.
- The investigation will have a significant impact on the opinions on the financial statement. The financial statement needs to include the details about this particular matter. Along with the details, it also needs to accommodate the contingent liability which may arise in the future. The notes to financial statements should include that the site forms a part of the list which is severely damaged. Future legal liability and financial liability should be ascertained and should be shown in the financial statements. The investigation will show an effect on the opinion on the financial statements in terms of its revenues and towards social responsibility.