Contingent Liabilities Audit Working Paper
(Following draft may be used as an example)
Background:
Contingent liabilities of {{client_name}} include claims against the company not acknowledged as debts, disputed direct- and indirect-tax demands, pending litigation, guarantees given on behalf of subsidiaries / third parties, letters of credit and other commitments not provided for in the books.
Purpose:
To document the audit work performed on the identification, classification, measurement and disclosure of contingent liabilities and commitments of {{client_name}} as at {{period_end}}, in accordance with Ind AS 37 / AS 29 and SA 501 (litigation and claims).
Work Done:
1. Identification
- Obtained the list of contingent liabilities prepared by management, with sub-classification: tax demands (income tax, GST, customs, excise legacy), legal cases, guarantees, LCs, capital commitments, and other.
- Reviewed minutes of board / audit-committee meetings for the year and post year-end for references to disputes, claims and significant commitments.
- Read material contracts for indemnity clauses, performance guarantees and onerous contracts.
- Reviewed legal & professional expense ledger for payments to law firms; followed up on each engagement for status.
2. External Confirmations — Lawyers (SA 501)
- With management's authorisation, sent direct external confirmations to the company's external legal counsel covering: (a) cases handled during the year and the period after, (b) estimate of probable outcome, (c) likely range of loss.
- Followed up non-responses and assessed alternate evidence (case files, court orders).
- Compared lawyer-confirmed list with management's list and investigated differences.
3. Tax Demands
- For each material tax demand (income tax, GST, customs, etc.), obtained the appeal status, latest order copy, amount in dispute, year of dispute and forum where the appeal is pending.
- Discussed with tax counsel / in-house tax team on the likelihood of outflow.
- Cross-checked GST demands against the GST portal and outstanding orders.
- Verified that demands paid 'under protest' are correctly classified as receivable, not expense.
4. Guarantees, Letters of Credit, Commitments
- Obtained bank confirmation under SA 505 covering all outstanding bank guarantees and LCs at year-end.
- Verified compliance with Section 186 of the Companies Act, 2013 for corporate guarantees and loans to related parties.
- Obtained the list of capital commitments (contracts entered into but not provided for) and reviewed supporting purchase orders.
5. Probability Assessment under Ind AS 37 / AS 29
- For each material item, reviewed management's assessment of probability of outflow: 'remote' / 'possible' / 'probable'.
- Where outflow is probable AND amount can be reliably estimated: tested recognition as provision, not contingent liability.
- Where outflow is possible: tested disclosure as contingent liability.
- Where outflow is remote: confirmed no disclosure required, but documented our agreement.
6. Management Representation Letter (SA 580)
- Obtained specific representation in the MRL covering: complete disclosure of all litigation, claims and assessments; no undisclosed contingent liabilities; estimate of outflow where reasonable.
- Reviewed consistency of MRL with our independent findings.
7. Disclosure
- Verified that the disclosure in the notes to accounts includes: nature of contingent liability, estimate of financial effect, indication of uncertainties and possibility of reimbursement.
- Confirmed compliance with Schedule III, Part I — Notes for contingent liabilities and commitments.
- For continuing items, verified continuity in disclosure across years and reasons for changes in amount.
Schedule of Contingent Liabilities
| Particulars | Forum / Authority | Period of dispute / commitment | Amount in dispute (₹) | Amount paid under protest (₹) | Net contingent (₹) | Probability assessment | Remarks |
|---|
| Income-tax demands | | | | | | | |
| GST demands | | | | | | | |
| Customs / Excise (legacy) | | | | | | | |
| Civil suits / commercial litigation | | | | | | | |
| Labour matters | | | | | | | |
| Bank guarantees outstanding | | | | | | | |
| Letters of credit outstanding | | | | | | | |
| Corporate guarantees | | | | | | | |
| Capital commitments (net of advances) | | | | | | | |
| Other commitments | | | | | | | |
Conclusion:
Based on the procedures performed, contingent liabilities and commitments of {{client_name}} as at {{period_end}} have been identified, measured (where required) and disclosed in accordance with Ind AS 37 / AS 29 and Schedule III. The disclosure in the notes is complete and consistent with external lawyer confirmations and bank confirmations. No instances were noted where a provision was warranted in lieu of disclosure.
