ACCA AA · Chapter 11 · Question 7 of 12
A former employee is suing Bodkin Co for $400,000. The company's lawyers state that it is possible, but not probable, that the claim will succeed. Materiality is $150,000. What treatment should the auditor expect in the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) No provision, but disclosure of a contingent liability
Explanation
Under IAS 37 a provision is recognised only when an outflow is probable and can be reliably estimated. Where an outflow is possible but not probable, and not remote, a contingent liability is disclosed. As $400,000 exceeds materiality, the auditor should check that the disclosure is adequate, and may obtain evidence through a letter to the entity's lawyers.
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