Prepare your response to the requirements in Question Requiring Analysis 15-30. This one is kind of fun and there is a bit of research that can be done (for example, what is an accommodation endorsement?
15-30
(a) Yes, the auditors should act upon the information obtained from the telephone call. The auditors should not engage in eavesdropping, but there is no suggestion of such action in this instance. Auditors certainly are not supposed to close their ears or eyes to the happenings about them during the course of an examination. On the contrary, they should be alert to recognize significant evidence in any form. The auditors should immediately inform the president of their interest in accommodation endorsements or any other form of contingent liability.
(b) The contingent liability for the accommodation endorsement should be disclosed in a note to the June 30 balance sheet. The note should indicate that the contingent liability was ended during July by payment by the maker at maturity. The purpose of the disclosure is to make readers of the statement aware that Columbia Corporation has in the past incurred contingent liabilities by accommodation endorsement of notes. The reader is thus warned of the possibility of such situations arising again, although no such specific suggestion should be made in the note to the financial statements. Inclusion of the note may also have the incidental effect of impressing upon the client the importance of contingent liabilities in a statement of financial position.
(c) The contingent liability might have been detected by the following auditing procedures:
(1) Obtain a liability representation from the client. Insistence upon a written statement by officers concerning any loss contingencies of which they have knowledge is probably the most effective way of detecting such items.
(2) Review the minutes of directors’ meetings. Prior approval of such endorsements should be obtained from the board before an officer endorses a note of another company. The bylaws may prohibit such lending of the company’s credit.
(3) Send a confirmation to the client’s financial institution specifically confirming the details of any contingent liabilities.
(4) Request the attorneys of the client to advise the auditors directly of any contingent liability of which the attorneys have knowledge. It is possible that the client may have discussed with the attorneys the risk involved in accommodation endorsements.