Lawyer's Letters Flashcards
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
“We believe that the possible liability to the company is nominal in amount.”
“We believe that the action can be settled for less than the damages claimed.”
“We believe that the plaintiff’s case against the company is without merit.”
“We believe that the company will be able to defend this action successfully.”
“We believe that the action can be settled for less than the damages claimed.”
This answer is correct because the statement that the likely settlement is less than claimed is very general and may or may not involve a material amount.
Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
Inspect checks included with the client’s cutoff bank statement.
Obtain a letter of representations from the client’s underwriter of securities.
Apply ratio analysis on the current year’s liability accounts.
Read the file of correspondence from taxing authorities.
Read the file of correspondence from taxing authorities.
This Answer is Correct
This answer is correct because information on litigation, claims and assessments relating to various tax issues may be presented in correspondence from taxing authorities.
“In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies.” The forgoing passage most likely is from a(n)
Audit inquiry letter to legal counsel.
Management representation letter.
Audit committee’s communication to the auditor.
Financial statement footnote disclosure.
Audit inquiry letter to legal counsel.
This answer is correct because an audit inquiry letter to the legal counsel includes such a sentence.
An attorney responding to an auditor as a result of the client’s letter of audit inquiry may appropriately limit the response to
Items which have high probability of being resolved to the client’s detriment.
Asserted claims and pending or threatened litigation.
Legal matters subject to unsettled points of law, uncorroborated information, or other complex judgments.
Matters to which the attorney has given substantive attention in the form of legal consultation or representation.
Matters to which the attorney has given substantive attention in the form of legal consultation or representation.
This answer is correct because the professional standards state that an attorney may appropriately limit his response to matters to which he has given substantive attention in the form of legal consultation or representation.
A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should alert the auditor that
Undisclosed unasserted claims may have arisen.
The attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments.
The auditor should begin a completely new examination of contingent liabilities.
An adverse opinion will be necessary.
Undisclosed unasserted claims may have arisen.
This answer is correct because the auditor is concerned with obtaining from the client’s lawyer corroborating evidence concerning information furnished by management regarding litigation, claims, and assessments. The resignation of the client’s lawyer may indicate the development of a conflict between the client and the lawyer regarding undisclosed unasserted claims. However, the lawyer is required to consider resigning in such a circumstance. Accordingly, the auditor should inquire as to the nature of the lawyer’s resignation.
An auditor would be most likely to identify a contingent liability by obtaining a(n) Accounts payable confirmation. Transfer agent confirmation. Lawyer’s letter. Related-party transaction confirmation.
Lawyer’s letter.
This answer is correct because lawyers often address contingent liabilities relating to their clients.
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
“I believe that the plaintiff will have problems establishing any liability.”
“I believe that this action has only a remote chance in establishing any liability.”
“I believe that the plaintiff’s case against the company is without merit.”
“I believe that the company will be able to defend this action successfully.”
“I believe that the plaintiff will have problems establishing any liability.”
This answer is correct because this statement is unclear and does not help the auditors to determine whether such legal matters have been properly reported.
Bookmark currently added.
EVID-0142B
Use V-O keys to navigate.Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?
Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.
Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.
Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.
Obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.
Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.
The requirement is to identify the procedure that is not performed regarding litigation, claims, and assessments. Answer (b) is correct because the CPA does not confirm directly with the client’s lawyer that all claims have been recorded in the financial statements. Answers (a), (c), and (d) are all incorrect because they represent information obtained from management regarding litigation, claims, and assessments as summarized in AU-C 501.
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
“I believe that the possible liability to the company is nominal in amount.”
“I believe that the action can be settled for less than the damages claimed.”
“I believe that the plaintiff’s case against the company is without merit.”
“I believe that the company will be able to defend this action successfully.”
“I believe that the action can be settled for less than the damages claimed
The requirement is to identify the lawyer’s letter comment that is most likely to cause the auditor to request clarification. Answer (b) is correct because a statement that the action can be settled for less than the damages claimed is unclear as to the details of the attorney’s belief. Answers (a), (c), and (d) are all incorrect because they represent responses that may be clearly interpreted by the auditor. See AU-C 501 for information on assessing lawyer’s evaluations of the likely outcome of litigation.
The letter of audit inquiry addressed to the client’s legal counsel will not ordinarily be
Sent to a lawyer who was engaged by the audit client during the year and soon thereafter resigned the engagement.
A source of corroboration of the information originally obtained from management concerning litigation, claims, and assessments.
Limited to references concerning only pending or threatened litigation with respect to which the lawyer has been engaged.
Needed during the audit of clients whose securities are not registered with the SEC.
Limited to references concerning only pending or threatened litigation with respect to which the lawyer has been engaged.
This answer is correct because the letter of audit inquiry will not be limited to references concerning only pending or threatened litigation. Such a letter will seek information on claims, litigation, assessments, and unasserted claims, as well as on pending or threatened litigation.
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?
A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.
A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.
An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
This Answer is Correct
This answer is correct (least likely) because the auditor, not the attorney, makes a judgment on going concern statu
Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments?
Request the client’s lawyer to evaluate whether the client’s pending litigation, claims, and assessments indicate a going concern problem.
Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims, and assessments to which the lawyer has devoted substantive attention.
Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.
Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.
Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.
The requirement is to identify the audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments. Answer (c) is correct because auditors must discuss with management its policies and procedures for evaluating and accounting for litigation, claims and assessments. See AU-C 501 for this and other requirements. Answer (a) is incorrect because the client’ lawyer is not ordinarily asked to make an assessment about whether the client has a going concern problem (see AU-C 570) for information on an auditor’s consideration of a client’s ability to continue as a going concern). Answer (b) is incorrect because an auditor will not ordinarily examine legal documents in the client’s lawyer’s possession. Answer (d) is incorrect because an auditor will not ordinarily confirm with the client’s lawyer that all litigation, claims, and assessment have been recorded.
In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?
Confirm the details of outstanding purchase orders.
Apply analytical procedures to accounts payable.
Read the minutes of the board of directors’ meetings.
Perform tests of controls on the cash disbursement activities.
Read the minutes of the board of directors’ meetings.
This answer is correct because reading the minutes of board of directors’ meetings may reveal contingent liabilities such as litigation facing the firm, or other possible losses.
What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?
Examining legal invoices sent by the client’s attorney.
Verifying attorney-client privilege through interviews.
Reviewing the response from the client’s lawyer to a letter of audit inquiry.
Reviewing the written representation letter obtained from management.
Reviewing the response from the client’s lawyer to a letter of audit inquiry.
This answer is correct because the professional standards outline an approach in which auditors obtain information from a client’s lawyer to corroborate client information on litigation, claims, and assessments.
The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered Grounds for an adverse opinion. A limitation on the scope of the audit. Reason to withdraw from the engagement. Equivalent to a significant deficiency.
A limitation on the scope of the audit.
The requirement is to identify the correct statement concerning the refusal of a client’s attorney to provide information requested in an inquiry letter. Answer (b) is correct because AU-C 501 indicates that this is a limitation on the scope of the audit. Answer (a) is incorrect because the lack of information is unlikely to lead to an adverse opinion since no information has been provided indicating that the financial statements are misstated. Answer (c) is incorrect because withdrawal is not generally necessary due to the client’s attorney’s failure to provide information. Answer (d) is incorrect because significant deficiencies pertain to weaknesses in internal control.
