# Audit of Provisions and Contingent Liabilities
## The Audit Trigger
Provisions and contingent liabilities are high-judgement areas. Understatement is the typical management bias. The auditor must verify both recognition (provisions) and disclosure (contingent liabilities).
## Audit Procedures — Existence, Completeness & Valuation
- Obtain list of all provisions and compare with ledger balances.
- Inspect underlying agreements to assess legal claims against the entity.
- Obtain the underlying working and basis for each provision.
- Where required, obtain an expert's report, calculation, and working for the provision amount (e.g., actuarial for gratuity, legal opinion for litigation).
- Obtain a Written Representation (WR) from management that all required provisions have been made per recognised accounting principles.
## Disclosure of Contingent Liabilities
Unless the possibility of outflow is remote, disclose for each class of contingent liability at the Balance Sheet date:
- A brief description of the nature of the contingent liability, AND, where practicable:
- An estimate of its financial effect.
- An indication of uncertainties relating to any outflow.
- The possibility of any reimbursement.
Where any of the above information is not disclosed because it is not practicable to do so, that fact must be stated.
## Recognition Decision Tree (AS 29 / Ind AS 37)
| Probability of Outflow | Treatment |
|---|---|
| Probable (>50%) and reliably measurable | Recognise as provision |
| Possible (but not probable), or probable but not reliably measurable | Disclose as contingent liability |
| Remote | No recognition, no disclosure |