During an audit engagement, an auditor is expected tocommunicate with lawyers concerning litigation, claims, andassessments. Listen below are five situations regarding LCA. Thelast clause or sentence of each states a conclusion.
1. If the client’s lawyer is silent on certain aspects of anattorney’s letter request, the auditor may infer the response iscomplete.
2. Letters of audit inquiry ask for the lawyer’s evaluation of theprobable outcome of matters reported in the response. If thelawyer’s response does not contain this evaluation, the auditorshould conclude the scope of the audit has been restricted.
3. The Top Dollar Corporation is involved in litigation for whichthe potential liability is so great that an unfavorable judgementat or near the claimed amount would seriously impair itsoperations. This is how the company’s attorneys answered the legalconfirmation request: “Although no assurance can be given as to theoutcome of this action, based on the facts known by us to date, inthe confidence of the attorney/ client relationship and otherwise,and our understanding of the present law, we believe the companyhas good meritorious defense to the claims asserted against it andshould prevail.” On this basis, the independent auditor may issuean unqualified opinion.
4. In situations where the auditor has orally discussed mattersinvolving litigation with the client’s legal counsel and obtainedhis oral opinion on the outcome of disputed matters, it is notnecessary to obtain written confirmation of these oral opinions ifthe auditor has summarized the attorneys’s opinion in a memo to theworking papers.
5. For the past 10 years, XYZ Company has used the services ofJJH&I for its primary legal advice and in many significantmatters of litigation. Ninety-five percent of JJH&I’s washandling litigation involving great potential liability to thecompany and has now responded to the auditor’s letter of inquiry.If we assume full disclosure, complete reliance can be placed onthis response.
Required
For each case, indicate whether you agree or disagree with theconclusion and the reason(s) therefore.
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