Harold White 11/25/2013 Auditing TrueBlood Case 12-7

1. After reviewing the clients accounting procedures for the asbestos litigation liability I believe the appropriate accounting literature to classify this would be a loss contingency. This is because the client would be dealing with uncertainty when accounting for such losses. Accounting uses two main methods approaches to dealing with it including: 450-20-05-4 a. Recognition using a probability threshold b. Measurement using a fair value objective The fair value would be the best method because it is not an estimate of the ultimate settlement amount or even the present value of an estimate. Things such as future cash flows to settle liabilities and outcome likelihoods are utilized when measuring the fair value of the liability. Also, ASC 450 says the accruals of loss contingencies do not provide financial protection. If you cannot provide financial protection for the future of your company, this definitely has correlation with estimates. The estimates projected are not reasonably approximated because they do not shed much light on the going concern for period of time. According to section 450-20-05-8, accruals of a loss related to a dont

have funds aside to lessen the financial impact of a loss and 450-20-05-9 states that to combat this an entity may choose to have access to sufficient liquid assets. 2. To identify loss contingencies the auditor should perform an array of procedures. They could include, but are not limited to reviewing the meeting of directors, stockholders, and appropriate committees held during and subsequent to the period being audited (AU sec337). As well as inquire to the clients lawyer to assist in corroborating the information given by management concerning litigation, claims, and assessments. Also, reviewing correspondence with financial institutions/regulatory agencies, and sending confirmations to these institutions. Lastly, the auditor could obtain a representation letter from officers of the entity. 3. Qualitative considerations can influence the auditor in coming to a decision to the question of whether or not misstatements are material. The auditors materiality position is a matter of judgment and shaped by their perspective of the needs of that particular entity. Qualitative factors possibly considered could include: a. Potential effect of misstatement on trends (profitability) b. The sensitivity of the circumstances surrounding the misstatement, for example, the implications of misstatements involving fraud and possible illegal acts, violations of contractual provisions, and conflicts of interest. c. The sensitivity of the circumstances surrounding the misstatement, for example, the implications of misstatements involving fraud and possible illegal acts, violations of contractual provisions, and conflicts of interest.

d. The sensitivity of the circumstances surrounding the misstatement, for example, the implications of misstatements involving fraud and possible illegal acts, violations of contractual provisions, and conflicts of interest. e. The cost of making the correction f. The sensitivity of the circumstances surrounding the misstatement, for example, the implications of misstatements involving fraud and possible illegal acts, violations of contractual provisions, and conflicts of interest. 4. Overall, accounting for contingent losses currently is quite similar between IFRS and U.S. GAAP. A loss contingency is accrued under U.S. GAAP if it's both probable and can be reasonably estimated. IFRS is similar, but defines probable as more likely than not, which is a lower threshold than typically associated with probable in U.S. GAAP. Also, IFRS refers to these accrued liabilities as provisions, while the term contingent liabilities is used for all of these obligations in U.S. GAAP. And, if there is a range of equally likely outcomes associated with a contingency, IFRS requires using the midpoint of the range, while U.S. GAAP requires use of the low end of the range. Another difference in accounting relates to whether to report a long-term contingency at its expected future value or its present value. IFRS requires reporting present values of estimated cash flows when the effect of time value of money is material. U.S. GAAP allows using present values under some circumstances when the timing of cash flows is fixed or reliably determinable. (McGrawHill)