Refer to textbook chapter 14 section titled Reviewing and Assessing Contingencies. This question deals with probabilities and estimations of potential litigation claims. In Accounting Standards Codification (ASC) 450 (formerly Statement of Financial Accounting Standard (SFAS) No. 5, Accounting for Contingencies), the Financial Accounting Standards Board (FASB) provides the standard for accruing and disclosing three categories of potential losses that can be reasonably estimated. Those categories reflect the contingent nature of those losses and the guiding criteria are organized around probability of outcomes classified as (1) probable, (2) reasonably possible, and (3) remote.

The basis for this question is that the audit client is being sued for $500,000 for discriminatory hiring practices. Match the appropriate action with respect to each of the circumstances below.

The lawyer stated that the client will probably lose and the amount of the loss could be anywhere between $250,000 and $500,000, but most likely will lose $400,000. The client accrued a $250,000 contingent loss and disclosed the situation.

The lawyer stated that there is a remote chance that the client will lose. The client did not accrue any contingent loss or disclose this situation.

The lawyer stated that the client will probably lose, and the amount of loss could be anywhere between $250,000 and $500,000, with no amount within that range being more likely than another. The client disclosed this situation, but did not accrue a loss.

The lawyer stated that there is a reasonable possibility that the client will lose. The client disclosed this situation and accrued a loss of $250,000.

The auditor should ask the client to accrue the minimum of the range of $250,000 and disclose the contingency and the fact that the loss could be as much as $500,000.

The auditor should ask the client to adjust the accrual to $400,000. The disclosure should indicate the range and the amount actually accrued.

No action is necessary. The client has properly handled this.

The auditor should ask the client to adjust the accrued loss to zero and to disclose the contingency.