Lawyer's Letter

Question 1

When are contingent losses realized on the financial statements?

Answer 1

Conservatism tells us we should recognize they’re sooner.

• remote
• reasonably possible
• probable

Question 2

How does an auditor identify the lawyers to be used?

Answer 2

• Inquire of management (primary source)
• Inspect relevant invoices (for legal expense)
• Review the board minutes

Question 3

Management would like to verify/Cooberate management’s responses to legal issues, how do they do that?

Answer 3

Through a letter of inquiry

Question 4

What is a letter of inquiry?

Answer 4

Letter has to sent via management to the attorney. Attorney will then respond to the auditors.

Has to be an client letterhead

Purpose:
- to verity what management has said
- encourage attorney to provide response relatively close to the end of fieldwork (for issues past year-end)
-

Question 5

What are the two primary categories of legal matters?

Answer 5

1) Asserted claims “pending or threatened claims”- lawyer should tell the auditor directly about any omissions of such matters from the letter of inquiry

If there is an omission of an asserted claim, the attorneys will let you know.

2) Unasserted Claims- An event HAS occurred but no one has stepped forward to sue. The lower CANNOT divulge omissions from the letter of inquiry directly to auditors (but should advise management to discuss it with auditors!)

Question 6

What is the objective for litigation claims and assessments? (what is the assertion)

Answer 6

Completeness!!

Question 7

What is the applicable audit procedures to figure out if there are litigation issues? (In proper order)

Answer 7

1) Inquire of management & others
2) Obtain from management a description of litigation, claims, and assessments
3) Review minutes of meetings of those charged with governance
4) Review legal expense accounts & invoices from external legal counsel
5) Seek direct communication with external counsel “send a letter of inquiry”
- Has to be from management but we draft the letter. Done on client letterhead.
- In-house legal counsel handles such matters, the auditor should communicate similarly

Question 8

If there is no risk of material misstatement, do you have to send a lawyer letter?

Answer 8

No, but you need to document why you chose not to seek direct communication with the attorney.