Kroger evaluates contingencies based on the best available resources and evidence. Additionally,
Kroger believes that having allowances for loss have been both necessary and reasonable for
contingent liabilities (SEC, 2018). d Through evaluation, two principal contingencies of insurance and
litigation were discovered. The litigation contingency appears more prominent for me because it is
inclusive of all claims and lawsuits that arise during normal business operations. d Litigation
contingent liabilities can include antitrust lawsuits, wage and hour lawsuits, civil rights, or product
liability lawsuits (SEC, 2018). d In the case of the selected 10-K Kroger had already determined that
these lawsuits had already become class actions and/or sought substantial damages. Considering
the nature of Kroger’s business most of the times the results of these suits are unforeseeable but
probable enough to be evaluated. However, Kroger believes that regardless of the outcomes of
these lawsuits there will not be a material effect on the company’s financial position, operations,
or cash flows. Due to this belief Kroger chose to notate the contingent liability instead of
recognizing it in the financials (SEC, 2018).
It is essential for auditors follow their procedures to find undisclosed contingent liabilities. d In the
case of finding litigation contingent liabilities such as those of Kroger auditors would want to
perform extended search procedures (Garcia, 2017). This could include the review of company IRS
reports for unsettled income tax liabilities, the review of board of director meetings where the
discussion of current and/or pending lawsuits may have taken place and review legal expense
accounts as the support for any transactions in those accounts could shine light on contingent
liabilities (Garcia, 2017).
Tesla, Per Tesla’s 10-k there were several contingencies listed as footnotes to the financial
statement. I focused on one of the pending lawsuits that were listed under footnote 15. This
contingency cannot be reasonably estimated and was therefore disclosed in a note to the financial
statement
In June 2018 a class action lawsuit was filed against the CEO and members of the board of
directors for alleged corporate waste, unjust enrichment, and breach of fiduciary duties by
approving the stock-based compensation plan awarded to Elon Musk. The complaint seeked,
among other things, monetary damages and rescission or reformation of the stock-based
compensation plan. The corporate waste charges were dismissed in Sept 2019, however claims of
fiduciary duties breach still stands with the current trial set for April 2022. (As of the time of filling
for the 2022 10-k)
To determine if the contingency liabilities are properly disclosed; the auditor should inquire of
management on the policies for identifying and accounting for contingencies. Auditors should
make examinations of documents pertaining to the contingencies as well as notes of stockholder,
director meetings or other committee meetings notes, and other documents to obtain more
information. The auditor should also review all correspondence from lawyers and finally obtain a
letter of audit inquiry to the client’s lawyer which can be used to verify the information provided
by management.
By completing these processes, the auditor would be able to understand how management
identifies and defines a possible contingency. And by reviewing of meeting notes,
correspondences, and other relevant documents the auditor the ability to possibly determine a
contingency that was not deemed important, was overlooked, or attempted to be hidden, by
management.
References
Tesla, Inc. Form 10-K For the Fiscal Year Ended December 31, 2021. United States Securities and
Exchange Commission. Retrieved from
https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000095017022000796/tsla-
20211231.htm#item_8_financial_statememts_supplementar
Garcia, M. (2017, November 21). Audit Procedures for a Contingent Liability. Retrieved October
13, 2022, from https://smallbusiness.chron.com/audit-procedures-contingent-liability-75889.html
SEC. (2018, February 3). Kr_Current_Folio_10K. Retrieved October 13, 2022, from
https://www.sec.gov/Archives/edgar/data/56873/000155837018002753/kr-20180203x10k.htm
