Rossi Inc. Essay

BackgroundRossi Inc. is a diversified manufacturer of industrial products. In 2008, Rossi updated its asbestos judicial proceeding financial obligation, including the cost of settlement payments and defense costs relating to currently pending claims and rising claims projected to be filed against the Company done 2017 for losses incurred to date. Before 2008, the Companys previous imagine was for claims projected to be filed through 2011. As part of the 2008 update to the asbestos litigation liability, Rossi engaged Thompson and Associates, a consulting firm, to serve as an external specialist to melodic theme the claims liability for celestial latitude 31, 2008. As a result of the 2008 update and the external specialist claims estimate, the Company importantly increased its recorded asbestos litigation liability by $586 million, arriving at a total liability estimate of $1,055 million as of celestial latitude 31, 2008. During 2009, excess payments against the reserve reduced t he recorded liability to $962 million.As of December 31, 2009, the Company performed an analysis of the asbestos litigation reserve and pay offd that the asbestos litigation liability should remain at $962 million. In 2009, Rossi Inc.s average cost per claim litigation increased from $29,000 in 2008, to $34,000 due to managements aggressive approach. This resulted in Thompson concluding that the litigation liability account should concur a carrying value of $1,124 jillion instead of $962 Million. Management of Rossi Inc. thinks that there aggressive approach to litigation claims in 2009 and revised defense dodge testament decrease litigation cost and defense cost in the future. Research disbeliefYou have been asked by the engagement partner to review the lymph glands accounting for the asbestos litigation liability and determine the appropriate accounting literature for Rossis recognition and measurement of the asbestos litigation liability.Relevant Literature be Standards Cod ification 450-20-25-1 & 2 Loss Contingency Recognition 25-1 When a loss accident exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability tail assembly range from presumptive to remote. Asindicated in the definition of contingency, the term loss is employ for convenience to include many charges against income that are commonly referred to as expenses and new(prenominal)s that are commonly referred to as losses. The Contingencies event uses the terms probable, reasonably possible, and remote to identify three areas within that range. 25-2 An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met a. Information ready(prenominal) before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at t he date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is unstated in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. b. The get along of loss can be reasonably estimated.Managements ApplicationRossi Inc. records indicate that litigation liabilities exist and that un-asserted litigations will arise in the future for events which occurred before December 31st, 2009. These claims can be reasonably estimated based a frequency severity method used in many asbestos litigation cases. Therefore, Management of Rossi Inc. has met both conditions and correctly accrued the reasonably estimated cost of the litigation liabilities. accounting system Standards Codification 450-20-30-1 Initial Measurement If some sum up within a range of loss appears at the time to be a better estimate than any another(prenom inal) amount within the range, that amount shall be accrued. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall be accrued. Even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined, it is not in all likelihood that the ultimate loss will be less than the minimum amount.Application concord to the Internal actuarial Specialist Report, the estimated cost of litigation ranges from $907 million to $1,514 million. Accounting Standards Codification 450-20-30-1 says that Rossi Inc. must accrue the lower amountof the range which is $907 million. The caller-up must also create a disclosure note acknowledging that it is possible the litigation liabilities could cost as much as $1,514 million if the excess is reasonably probable. Research QuestionWhat additional audit procedures, if any, should you suggest to the engagement partner in order to pass judgment the appropriateness of the asbestos litigation liability as of December 31, 2009?Relevant LiteratureStatements on Audit Standards No. 12- AU section 337 carve up 6 & 7 .06 An auditor ordinarily does not possess legal skills and, therefore, cannot make legal judgments concerning entropy coming to his attention. Accordingly, the auditor should request the clients management to send a letter of interrogative sentence to those lawyers with whom management consulted concerning litigation, claims, and assessments. .07 The audit normally includes certain other procedures undertaken for different purposes that might also disclose litigation, claims, and assessments. Examples of such procedures are as follows Reading proceedings of meetings of stockholders, directors, and appropriate committees held during and subsequent to the period being audited. Reading contracts, impart agreements, leases, and correspondence from taxing or other governmental agencies, and similar documents. Obtaining selective information concerning guarantees from bank confirmation forms. Inspecting other documents for possible guarantees by the client.ApplicationThe engagement partner should ask management to send their legal guidance a letter of inquiry, outlining all litigation procedures currently in progress and claims or assertions for future litigation. Because of attorney-client confidentiality, the lawyer may refuse to response to the letter of inquiry alternatively, the engagement partner can obtain this information from other sources. The engagement partner can read the documented minutes of meetings of directors and company committees, as considerably as, contracts created between Rossi Inc. and its customers for possible grounds for future lawsuits. The auditor should also strive to understand how Rossi Inc. management developed its estimate for the litigation liability, then he/she should review and test those procedures used by management. Research QuestionConsidering the ran ge of the estimated claims liabilities, do you believe that there is an uncorrected liable(predicate) misstatement that the engagement partner should request the client to correct?InterpretationThe engagement team has already determined that the litigation liabilities account is a real(a) account with corporeality for the audit set at $12.5 million. The litigation liabilities account currently has a symmetricalness of $962 million however, ASC 450-20-30-1 states that account should reflect the lower amount of the reasonably measured range of possible litigation cost. The amount which should be recorded is $907 million which is $55 million less than the currently recorded amount. With materiality set at $12.5 million, the engagement partner should request Rossi Inc. correct the amount of the litigation liabilities account to pee the likely misstatement.ConclusionRossi Inc. has met both conditions of ASC 450-20-25-2 because it is probable the company will have litigation losses i n the future from events which occurred during or before this accounting period. These losses have been reasonably estimated into a range of $907 to $1,514 million. According to ASC 450-20-30-1, when a range exists and no number in the range is more likely to occur the company should accrue the lowest amount of the range. The audit should also inquiry about the accuracy of the litigation estimate. This can be accomplished by complying data obtained from inquiry letters to the clients lawyers, reading of minutes for meetings conducted by management or directors and by evaluating contracts between the client and their customers. The auditor must also evaluate the method of estimating the litigation liability. Finally, the engagement partner must ask Rossi Inc.s management to correct the likely misstatement due to the litigation liabilities account being overstated.