(d) As you have concluded that the likelihood of the claim being successful is only possible, it would be appropriate for the company to explain the contingent liability by way of note as required by IAS 37, giving a description of the nature of the contingent liability, an estimate of its fi nancial effect, an indication of the uncertainties relating to the amount and timing and the possibility of any reimbursement.
If the company includes a note of this nature, there would be no need to modify your audit opinion, however if the litigation is viewed to be exceptional then an emphasis of matter paragraph might be appropriate. However, if the contingency is not disclosed, the auditor would modify the audit opinion on the grounds of an ‘except for’ disagreement and include in the report the required details of the contingent liability. The auditor should try to persuade management to include the disclosure before
issuing the modifi ed opinion. (Tutorial note: An ‘except for’ qualifi cation would be appropriate as the contingent loss is material only, that is, the uncertainty is not major.)
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