During the audit of contingent liabilities, your audit client provides the following information regarding potential liabilities:
• Your client has agreed to guarantee a loan in the amount of $5,000,000 for a related party and will be liable to repay the loan if the related party cannot do so.
• You have filed a lawsuit against a competitor for unfair pricing policies. You expect to win the lawsuit and could get a settlement for $20,000,000.
• You have received a letter from the IRS indicating that it has audited the corporate tax returns of the company for 2010 and 2011. The IRS has indicated that an additional $10,000,000 in taxes and penalties is due. You plan to contest the audit findings.
• A client's employee has filed a lawsuit against the company alleging age discrimination. The client's attorney thinks it could lose the lawsuit based on the employee's claims.
a. How will you gather evidence to collaborate the information provided by the client regarding these potential liabilities?
b. Which of these items will be recorded in the financial statements?
c. Which of these items will be disclosed in the financial statements?
d. Are any of the items not relevant to the financial statements? Explain your answer.