Lawyer's letters

Question 1

List the two types of letters involved in the communication with the entity’s lawyers.

Answer 1

Letter of inquiry: Management’s letter to the entity’s lawyer(s) (as requested by the auditor) asking the lawyer to provide litigation-related information directly to the auditor Lawyer’s letter: The lawyer’s response directly to the auditor

Question 2

What is the effect of a limitation in the lawyer’s response to the letter of inquiry on the audit report?

Answer 2

This would be considered a scope limitation sufficient to prevent an unqualified opinion and likely resulting in a disclaimer of opinion.

Question 3

What is the lawyer’s responsibility for communicating omissions of asserted and unasserted claims that should have been included in the letter of inquiry?

Answer 3

Regarding asserted claims: The lawyer’s letter should inform the auditor directly of such an omission from the letter of inquiry. Regarding unasserted claims: The lawyer should inform management of such an omission and encourage management to discuss the matter with the auditor (but the lawyer will not inform the auditor directly)

Question 4

What is meant by the term “unasserted claims”?

Answer 4

An audited entity has exposure to litigation, but no one has yet filed a law suit or announced an intention to sue.

Question 5

Under what circumstances might an auditor not be required to obtain a letter from the entity’s legal counsel?

Answer 5

If the entity had no litigation, claims, or assessments having financial reporting relevance and, accordingly, did not engage legal counsel (In such a case, the management representations letter would include a statement to that effect.)

Question 6

What is meant by the term “asserted claim”?

Answer 6

Also referred to as “pending or threatened litigation”: A claim that has already been filed (pending) or when the other party has announced an intention to sue (threatened)

Question 7

List the four matters the lawyer’s letter should address regarding “asserted” claims.

Answer 7

1. )The nature of the litigation
2. )The progress of the case to date
3. )How management is responding or intends to respond to the litigation
4. )An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss

Question 8

What is the auditor’s purpose in obtaining a lawyer’s letter?

Answer 8

To corroborate management’s responses to the auditor’s inquiries about litigation-related issues

Question 9

List the three matters the lawyer’s letter should address regarding “unasserted” claims.

Answer 9

1. )The nature of the litigation
2. )How management intends to respond if the claim is asserted
3. )An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss