If you understand gap,
there are of course lawsuits are the cost of doing business these days.
Let's suppose that you are Chipotle.
If you know anything about Chipotle,
their food certainly taste good, but they've also had some supply-chain problems.
They've had a number of cases of people who have dined at Chipotle
becoming ill as a result of something in the supply chain.
There may have been some cases of just a store's not being clean.
This is not a slam on Chipotle,
it's just something that they have to deal with.
One thing they have to think about is well, if I, Chipotle,
if we are sued by customers,
how large of a liability,
if any, must we present in our financial statements?
Well, you may well know the gap here.
You're talking about a situation where if the amount of
the estimated litigation cost is estimable and probable, you have to book it, right?
If you have an estimable legal liability claim,
but it is not probable, but rather
less likely falling in the range of reasonably possible,
you have to disclose it in the notes.
Now if it's remote,
you don't have to book it and you don't have to disclose it.
But a lot of these legal claims fall in that space of not being
probable, but being in fact reasonably possible and still being estimable.
When you then disclose the nature of that liability in the footnotes,
there's actually a number of things that need to be carefully monitored by the auditor.
And usually the auditor will rely on a lawyer's letter from the client,
but also maybe gets a third party lawyer,
sometimes in their own firm, to look at this as well,
making sure that they're characterizing the nature of
this litigation liability appropriately and completely in the financial statements.
At the same time, management's not going to want to put some number in
the footnote because what sometimes will happen, any number you put in the footnote,
could become the floor in actual settlements.
So you'll see a reluctance to do that, for a lot of these contingent liabilities.
Rights and obligations, are you talking about
inventory on a consignment basis, being held-on consignment?
And then accuracy valuation and understandability,
information and notes fairly stated and expressed clearly.
The presentation and disclosure,
sometimes the basic financial statements, it's going to be 4 or 5 pages,
and the financial statements including the footnotes could be 40 or 100 pages.
Those footnotes are actually where the auditor is earning much of the audit fee.
Footnotes are incredibly complex and there needs to
be special set of care, special care taken by the auditor to make sure presentation disclosure is attended to.