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 the contingencies should be reported based on the probability of occurrence and the
total amount.
References:
Corporate Finance Institute. (2022, February 16). Materiality Threshold in Audits. Retrieved
October 13, 2022, from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/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/1018724/000101872422000005/amzn-
20211231.html
