Running head: CURRENT TRENDS AND ISSUES IN THE AUDIT PROFESSION 1
Current Trends and Issues in the Audit Profession
Contingency refers to the condition whereby something may or may not occur; something that is contingency is an event that occurs by chance and without the intent or by coincidences (Rorty, 1989). A contingent event may also be a possible future event or condition or an unforeseen occurrence that may necessitate special measures or something liable to happen as a chance feature or accompaniment of something else. Setting contingency is a matter of some tension between project director, who generally wants the contingency allowance set high to permit greater flexibility and protection from uncertainty, and the owner who wants the contingency set low to maintain greater control over the project. If the contingency is set too low, the upper management will be in the position of micro-management while if the contingency is set too high the management may not be sufficiently involved. Project policies and procedures documents address the different kinds of contingencies, the need for contingency allowances, who controls them, and what should happen if they are not expended. The management should consider the three levels of contingency which determine the need for contingency allowance, who controls them, and what should happen if they are not expended. A bank always needs to put on contingencies and this is because the occurrence of different events may occur; some events happen naturally other events such as fire also may occur. The occurrence of the event is not expected and thus why a bank needs to put on a contingency. First, the management should know that contingency is not a cost control method but its purpose is to ensure there are adequate funds to pay for uncontrolled things. The management needs to first ascertain possible negative events which may occur causing the organization destruction. When the need of contingency is identified it becomes easy for the bank to put on a plan to control in case of any negative occurrence. Another thing which needs to be considered when setting up a contingency is who will control them; when this is realized it will be easy to set them as there will be a certain group who will be put in place to control them. What should happen if they are not expended; the organization needs to ascertain what will happen if they are not carried out. This will help the organization to know what will happen and this will trigger the organization into carrying out the contingency plan to avoid disasters to happen.
An auditing according to Power (1999) is an official examination and verification of accounts and records mostly in financial accounts. Auditing is done to evaluate or improve its appropriateness, safety, and efficiency; when auditing is carried out in an organization difficulties are discovered and in case of theft or mismanagement of fund auditing helps to discover such occurrence of things. Safety is also increased and efficiency after an auditing; in case 12 of the Lakeside Case Company Auditing cases the examination of a bank cut-off statement is a common audit procedure that serves to generate several types of corroborative evidence. In this case, the auditor seeks to verify the clients reported a balance for cash and related accounts.
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Many thefts and other illegal acts are perpetrated through the use of bank accounts that supposedly have been closed. An example of theft in a bank is whereby a dishonest employee utilizes a closed account to cash check made out in the name of the company. Additionally, the company itself can use a closed account to hide illegal payments or other transactions from auditors. To gain evidence on this an audit should be carried out from a closed account from a client. Auditors search for all possible contingent losses which would then be evaluated by the client; the client would describe these contingencies in a letter to the company’s legal counsel. The audit is important in each organization as it helps in discovering any theft or mismanagement of the funds; in case there is evidence of theft found proper actions are taken to look for who stole the money and from where. Fund mismanagement and theft leads to organization failure because instead of the company making profits it makes losses leading to its closure.
A contingent liability is any potential liability that may occur, depending on the outcome of an uncertain future event; contingent liability is recorded in the accounting records if the contingency is probable and the amount of liability can be reasonably estimated (Currie, 2002). Accountants record a journal entry to report a liability on the balance sheet and a loss or expense on the income statement only if the loss contingency is both probable and the amount can be estimated; when the contingent liability is possible but not probable journal entry is not needed. An estimated liability is a debt or obligation of an unknown amount that can be reasonably estimated meaning the organization or the management knows such liability exists. An entity or an organization may have liabilities; liabilities can be incurred depending on the outcome of an uncertain future event, for example, the outcome of a pending lawsuit, legal liability, destruction by flood or fire, liquidated and unliquidated damages or product warranty. The management of this organization should determine what their main liability is in their organization; mostly lawsuits and product warranties are the common contingency liability, this is because the outcome is uncertain. Therefore, the management should try hard to minimize these liabilities by first ensuring that their products are of quality and thus the customers do not return the product after purchase; this will minimize the liability in the organization.
Disclosure refers to additional information attached to an entity’s financial statements; it is usually an explanation for activities which have significantly influenced the entity’s financial results. Accrual is the adding together of interest or different investments over a period of time; an example of accrual in an organization is whereby a comp[any delivers a product to a customer who will pay it in 30 days, the company recognizes the proceeds as a revenue in its current income statement although it will get paid later. Accrued revenue is recognized before cash is received whereas an accrued expense is recognized before cash is paid out. In this case, when the auditing has been done it has helped to reveal previously hidden facts in the organization thus it is up to the management to take the proper actions. Auditing helps reduce theft in the organization as people or employee cannot steal from the organization on fear of being disclosed. Accruals are important in an entity as they help in determining gains and expenses in advance before their occurrence.
References
Currie, Elizabeth. (2002). The Potential Role of Government Debt Management Offices in
Monitoring and Managing Contingent Liabilities. Washington: World Bank.
Power, Michael. (1999). The Audit Society: Rituals of Verification . Oxford University Press.
Rorty, R. (1989). Contingency, irony, and solidarity . Cambridge University Press.
