Dealing with Audit of Provisions, Contingent Liabilities & Contingent Assets - Ind AS 37, SA 540, and SA 501

NFRA AUDITOR - AC INTERACTION SERIES 5

Preparation and presentation of financial statements require management to make estimates and judgements in the recognition/ measurement of assets, liabilities, income and expenses. Some of these could be complex requiring special attention by the preparers, AC and the Auditors.

The need:

The directive:

Ind AS 37
SA 540
SA 501
SA 505

Auditors and AC - Illustrative discussion points on this topic:

  • Evaluation of internal controls over identification and measurement of provisions and contingent liabilities.
  • Communication with external legal counsel and if not done, alternative procedures performed.
  • Need for use of independent legal counsel in case of complex litigations and claims.
  • Procedures to ensure completeness of provision for constructive obligations, and litigations and claims.
  • Appropriateness of measurement approach used by the Management for estimating and quantifying provisions.
  • Procedures performed to ensure completeness and accuracy of restructuring provision.
  • Specific procedures for restoration and rehabilitation fund.
  • Assessment of obligation under EU Directive on Waste Electrical and Electronic Equipment.
  • Assessment of Extended Producer Responsibility (EPR Liability) under Plastic Waste Management Rules 2016, E-Waste (Management) Rules, 2022, Battery Waste Management Rules, 2022 or similar laws and rules.
  • Adequacy and appropriateness of disclosures of provisions.
  • Review of movements in provision balances to identify any management bias or susceptibility for earnings management.
  • Whether contingent assets are disclosed only when the inflow of economic benefits is probable.
  • Cases of single obligation of large impact.
  • Reasonableness of discount rates and consideration of risks and uncertainties in cases of provisions where cash outflows are expected over longer period.
  • Virtual certainty of reimbursement receivable.
  • Evaluation of need of provision for onerous contracts.
  • Evaluation of need for impairment loss on entity’s operating assets.
SA 540
Auditing Accounting Estimates, Including Fair Value Estimates, and Related Disclosures
SA 501
Audit Evidence-Specific Considerations for Selected items
SA 505
External Confirmations

Key SAs that are relevant to dealing with audit of provisions, contingent liabilities & contingent assets:

Series 5
Ind AS
SAs