a. Leno Inc. wants to sale its land and building at a selling price of $19,750,000. The book value of such land and building is $3,420,000. As per findings it is analyzed that sale agreement has been made but risk, rewards and ownership is not transferred to the buyer till 31st march 2011.

Following terms has been noticed:

1. Sale agreement has been made
2. There is no any transfer of risk, rewards and ownership.
3. Sale agreement contains a letter of credit for amounting $5,000,000.
4. A sale of land and building is a contingent event hence buyer has option not to purchase the above assets.
5. Normal period of letter of credit is one year but buyer can enhance it till 2 years.
6. If buyer remains fail to complete transaction as per sale agreement than in that case amount of letter of credit is to be paid by the buyer to the seller.
7. If buyer execute the transaction as per sale deed agreement than such amount of letter of credit will be adjusted in predefined sale price.

For better understanding of the above transaction we should first understand the Contingencies and event occurring after the balance sheet date, contingences means a condition which results either will be gain or will be loss will be determined only on occurrence and non occurrence of one or more events on which it depends. If existence of an event is known at the balance sheet date but result of this event is unknown at the time preparation of balance sheet date. Result can be known only after occurring and non-occurring of such event.

Result of such event may be positive and may be negative.

If result is positive it means there will be some inflow and it will be recognized only after result but if result may affect the financial statements then separate disclosure is required.

In the given situation agreement of sale is a contingent event hence its execution depends upon future events. As per view of Leno Inc it is a contingent assets, here contingent assets means occurring and no occurring of an event will result cash inflow for the organization in near future and result of event will also be occur in future and if contingences exist on the balance sheet date and affects the financial items then separate disclosure is required in notes to accounts. In the given situation contingences exist on the balance sheet date and it has material influence on financial items hence it should be disclosed in notes to accounts.

If there is any contingent assets then it should not be adjusted in financial statements till the result is unknown and it can be adjusted only when it does not remain contingent. Hence no gain on sale will be recognized until the full consideration has not been received and all risk and rewards has not been transferred. Here amount of letter of credit will definitely be received to the Leno Inc whether event occurs or not but it is not clear that it will be revenue profit or capital profit hence it also depends on the event.

Here in the given situation disclosure required for:
1. Sale agreement and term and condition of sale
2. Letter of credit and amount of letter of credit

b. Additional evidences required by an auditors:
1. Check the ownership of land and building
2. Checking that there is no any charge on such assets
3. Inspection of sale agreement and deed signed by seller and buyer
4. Copy of letter of credit
5. Confirmation from bank for letter of credit
6. Free ownership of land and building
7. Risk and reward are transferred or not
8. Registration letter of land and building of seller
9. Transfer of registration letter
10. Transfer of physical ownership of land and building
11. Confirmation from registries authority
12. Amount of consideration
13. Market value of land and building given by an expert
14. Verifying that consideration is adequate or not
15. Book value of land and building and amount of depreciation
16. If any revaluation is made than AS-10 requirement followed or not
17. Proper valuation is made
18. Proper accounting is made for depreciation
19. Third party confirmation
20. Verifying the entries of sale of land and buildings
21. Check the reliability of internal control system for transactions
22. Check the substantive procedure whenever required
23. Check the accuracy, correctness and adequacy of transaction