The company I have chosen to investigate for contingent liabilities is Amazon. The last 10-K
reported for the company year ends December 31, 2021. When researching Amazon, the
contingent liabilities of the company are U.S. income taxes and foreign income taxes. Foreign
income taxes are subject to U.S. taxation. The contingent liability is shown in the footnotes as well
as the financial statements (Inline XBRL Viewer). Some procedures auditors may use to search for
contingent liabilities are probability of occurrence, and journal entries for probable events. For
probability of occurrence, it can be recognized in three levels which are remote, reasonably
possible, and probably, only the possible and probable contingencies will be disclosed in the
footnotes (Audit Procedures for a Contingent Liability). Since the income taxes are described in the
footnotes, we can see that probability of occurrence was used. For journal entries for probable
events, you would need to record probable contingencies on financial statements therefore
income taxes are a probable contingency because it is recorded (Audit Procedures for a
Contingent Liability). This means you could also use this procedure to realize this contingency. For
my discussion post I chose review the 10-K annual report of Meta Platforms on EDGAR. The report
states numerous times that they “are involved in legal proceedings, claims, and regulatory, tax or
government inquiries and investigations that arise in the ordinary course of business. Certain of
these matters include speculative claims for substantial or indeterminate amounts of damages.
Additionally, we are required to comply with various legal and regulatory obligations around the
world, and we regularly become subject to new laws and regulations in the jurisdictions in which
we operate. The requirements for complying with these obligations may be uncertain and subject
to interpretation and enforcement by regulatory and other authorities, and any failure to comply
with such obligations could eventually lead to asserted legal or regulatory action.” The report goes
on to describe how Meta Platforms management evaluates and makes decisions on contingencies.
“With respect to these matters, asserted and unasserted, we evaluate the associated
developments on a regular basis and accrue a liability when we believe that it is both probable
that a loss has been incurred and the amount can be reasonably estimated. If we determine there
is a reasonable possibility that we may incur a loss and the loss or range of loss can be reasonably
estimated, we disclose the possible loss in the accompanying notes to the consolidated financial
statements to the extent material.” This is a good policy for contingencies and they recorded a
value of $41,108,000 as a result.
Some procedures that can be undertaken to determine contingent liabilities in an audit are to
review the minutes of board of directors or shareholders meetings. It is possible that litigation and
other issues would be noted. The auditor can also review loan agreements, leases,
correspondence from governmental agencies, and any contracts currently in place. It would also
be important to obtain letters from Meta’s lawyers showing all litigation and perform other
procedures to test for unrecorded liabilities. Tax returns could also be used to identify unrecorded
liabilities.
The company I chose for the 10-K Annual Report is NIKE, Inc. Any business is subject to various
legal proceedings, claims, and government investigations that is related to its business. There is no
company that can predict the outcome of these pending matters. NIKE has received claims for
certain years from the Belgian Customs Authorities. This is technically for alleged underpaid duties
that are related to products imported in the fiscal year 2018. Edgar Entity Landing Page. (n.d.). d
The company has disputed these claims and started the process. At this time, its NIKE is unable to
estimate the range of loss and cannot predict the outcome. This resolution could take several
years on this matter. NIKE will have a huge negative effect on the cash flows if this company this
matter is resolved against NIKE. The foreign exchange derivative instruments are shown on the
balance sheet under assets and liabilities. These instruments are recorded as a fair value showing
the gain or loss within the balance sheet. If the foreign exchange was earned on the lance sheet
the liabilities would have been reduced by $43 million. The company received $962 million of cash
from counterparties that are related to foreign exchange instruments for August 31, 2022. There
was no amount for the liabilities balance as of August 31, 2022. Edgar Entity Landing Page. (n.d.).
At the end of the fiscal year of 2022, the company sold entities to Argentina, Uruguay, and Chile,
to third part distributors. It was shown on the balance sheet that there was a held-for sale with
prepaid expenses and other assets and liabilities until this transaction is closed.
Contingent liabilities are the amount that the company owes to whether an event will occur. The
most common source is outstanding lawsuits and products warranties. Management would
disclose all the contingent liabilities to their auditors. This is not a common thing, but auditors
should investigate different procedures after an inquiry. It is important that auditors are very
attention to any legal expense that is referring to the accounting system. d One of the procedures
that auditors use to search for liabilities is evaluating the materiality. Messier, W. F., (2019.) The
auditors must assess the materiality of the continent liabilities which is prior to considering the
specifics. Auditors should estimate the likelihood that an event will occur.
Messier, W. F., Glover, S. M., & Prawitt, D. F. (2019). Auditing & Assurance Services: A systematic
approach. McGraw-Hill Education.
Edgar Entity Landing Page. (n.d.). Retrieved October 13, 2022, from
https://www.sec.gov/edgar/browse/?CIK=320187&owner=exclude
Inline XBRL Viewer. Sec.gov. (2022). Retrieved 14 October 2022, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/1326801/000132680122000018/fb-
20211231.htm.
Messier, W. Glover, S. Prawitt, D. (2019). Auditing & Assurance Services: A Systematic Approach
11th Edition. McGraw Hill Education.
Audit Procedures for a Contingent Liability. (n.d.). Your Business.
https://yourbusiness.azcentral.com/audit-procedures-contingent-liability-29381.html
Inline XBRL Viewer. (n.d.). Www.sec.gov.
https://www.sec.gov/ix?doc=/Archives/edgar/data/1018724/000101872422000005/amzn-
20211231.htm
