[AMERICANDREAM]

In an audit of contingent liabilities, which of the following procedures would be least effective?

a) Examining customer confirmation replies –> Correct
b) Examining invoices for professional services –> Selected
c) Reviewing a bank confirmation letter

I was confused among the 3 choices above and I don’t get why the answer is a. I ultimately selected (b) because I thought “hmm, what can invoices reveal about contingent liabilities anyway???”. But I was wrong.

Could anyone weigh in?

[Anonymous]

A contingent liability is something that may need to be recorded in the FS…management would rather not accrue them.
Examining invoices for professional services can indicate something major…Say the company spent a ton of of money on billable lawyer hours could mean that something is up.
Next up, a bank confirm is a more reliable source than a customer if those are the choices.

That leaves a as the odd man out.

[Missy]

in (a) you'd be confirming how much the company is owed by its customers, so its an asset not a liability at all.

in (b) you would be looking at liabilities if the invoices hadn't been paid yet

so because a doesn't relate to a liability at all it is by far the least effective.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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