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CMA Intermediate · Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

While auditing a manufacturing company's financial statements, an auditor wants to confirm that all pending litigation against the company has been disclosed as a contingent liability or provided for. Which audit procedure is most directly aimed at obtaining this evidence?

The most direct procedure is obtaining a confirmation from the company's legal counsel about pending claims and litigation. This gives external evidence on whether claims exist and their likely outcome, supporting completeness of provisions and contingent liability disclosures, unlike procedures aimed at assets or depreciation.

  1. ARecomputing depreciation on plant and machinery
  2. BObtaining a confirmation from the company's legal counsel about pending claims and litigationCorrect
  3. CObserving physical verification of inventory at year end
  4. DVouching the purchase invoices of capital assets

Explanation

Direct confirmation from the entity's lawyers is the primary external evidence on litigation and claims, which bears on completeness of provisions and contingent liabilities. Depreciation recomputation, stock observation and capital asset vouching address other assertions and give no evidence on legal claims.

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