Verification of Contingent Liabilities

Verification of Contingent Liabilities

Meaning

Contingent liabilities are those liabilities, which may or may not arise in the future for payment. The auditor should ensure that all known and unknown liabilities have been accounted in the books of accounts and have been shown in the Balance Sheet.

The  following  are  the  examples  of Contingent Liabilities:

·           Liabilities on Bills Receivable discounted and not matured.

·           Liability on account of partly paid calls.

·           Liability on arrears of dividend on Cumulative Preference Shares.

·           Liability under a guarantee.

·           Liability for penalties under forward contracts

·           Liability that arises on account of litigation in respect of labour suits, trademarks, copyrights etc.

Auditor's Duty in Verifying Contingent Liabilities

1. Ensure Creation of Adequate Provision:

The auditor should ensure that proper provision has been made for certain liabilities, for example, liability which arise on account of litigation and if he is not satisfied, the fact should be stated in the report.

2. Disclosure in Balance Sheet:

In respect of certain liabilities for which no provision has been made in the books, for example, Bills Receivable which has been discounted, arrears of accumulated fixed dividend etc. The auditor should verify that such liabilities are disclosed as foot note in the Balance Sheet.