Mary Smith, CPA, has completed the audit of notes payable and other liabilities for Red Fox Ranch and now plans to audit for contingent liabilities and commitments.

• Distinguish between contingent liabilities and commitments and explain why both are important in an audit.
• Identify three useful audit procedures for uncovering contingent liabilities that Smith will likely perform in the normal conduct of the audit, even if she has no responsibility for uncovering contingencies.
• Identify three other procedures Smith is likely to perform specifically for the purpose of identifying undisclosed contingencies to help her obtain evidence about the completeness presentation and disclosure objective.
• Identify three useful audit procedures for uncovering commitments that Smith will likely perform as part of the audit of other accounts.

Question 2

Explain how an examination of prospective financial statements differs from a compilation of prospective financial statements. Describe the activities involved in an examination of prospective financial statements.