The contingent liabilities of Amazon’s tax contingencies are
reported in the company’s financial statements and footnotes. As
reported on the 10-K of the annual report for year ending December
31, 2021; one of the company’s contingent liabilities is income taxes in
the U. S. and various foreign jurisdictions. To determine their tax
position was uncertain and they must make significant judgment in their
evaluation. The company not only use significant judgement to
determine their tax position’s merits but also to measure the amount of
their tax benefits that will qualify for recognition. The company is
committed to recognizing and measuring their uncertain income tax
position to ensure the weight of their evidence will sustain an audit or
any litigation process. In Amazon’s disclosures they set aside
approximately $3.2 billion of accrued tax contingencies because it is
difficult to for them to make a reasonable reliable estimate of the
amount and period of payment if any. In preparation for the uncertain
tax liabilities that could be levied at any time, the company establish a
reserve for these tax related estimations.
An auditor must be mindful that even though, Amazon may
disclose their contingent liabilities in their financial statements and
footnotes, this may not be all the disclosures. Therefore, the steps an
auditor should take will include a search for undisclosed contingencies
by reviewing the company’s Internal Revenue Service reports for any
unsettled income tax liabilities. Also, a search of the board of directors
meeting minutes for discussions of potential or current lawsuits. The
auditor should pay special attention to the contents of the legal
expense accounts and the supporting documentation because
transactions may reveal contingent liabilities.
An evaluation of the materiality of the contingent liabilities to
determine the correct accounting treatment. Based on the company’s
financial situation, the auditor will determine a dollar amount they
consider significant prior to an examination of the specifics of the
contingent liabilities. If this liability is under the immateriality limit, it is
not necessary to have a special disclosure or treatment. If the
contingent liability is a material amount or if the amount cannot be
estimated, then the auditor should make an estimation that the event
will occur. An auditor will use their professional judgment to determine
if the likelihood is remote, reasonably possible, or probable because
GAAP does not specify these levels. Material liabilities must be
disclosed that are possible or probable by adding a footnote to the
company’s financial statement. These steps identified will assist an
auditor to determine whether or not the contingencies should be
reported based on the probability of occurrence and the total amount.
a
References:
Corporate Finance Institute. (2022, February 16). Materiality Threshold
in Audits. Retrieved October 13, 2022, from
https://corporatefinanceinstitute.com/resources/knowledge/acc
ounting/materiality-threshold-in-audits/
Law Insider. (n.d.). Reasonable estimate Definition. Retrieved October 13,
2022, from https://www.lawinsider.com/dictionary/reasonable-
estimate
Messier Jr., W. F., Glover, S. M., & Prawitt, D. F. (2017). Auditing &
assurance services: A systematic approach. In No Title (10th ed.).
New York, NY: McGraw-Hill Education.
PCAOBUS. (n.d.). AU Section 312: Audit Risk and Materiality in Conducting
an Audit. pcaobus.org. Retrieved October 13, 2022, from
https://pcaobus.org/oversight/standards/archived-
standards/details/AU312
U.S. Securities and Exchange Commission - Form 10-K: Amazon.com, Inc.
(n.d.). SEC.gov. Retrieved October 13, 2022, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/1018724/00
0101872422000005/amzn-20211231.htm
