Subsequent events

During an audit engagement, an auditor is expected to communicate with lawyers concerning litigation, claims, and assessments. Listen below are five situations regarding LCA. The last clause or sentence of each states a conclusion. 1. If the client’s lawyer is silent on certain aspects of an attorney’s letter request, the auditor may infer the response is complete. 2. Letters of audit inquiry ask for the lawyer’s evaluation of the probable outcome of matters reported in the response. If the lawyer’s response does not contain this evaluation, the auditor should conclude the scope of the audit has been restricted. 3. The Top Dollar Corporation is involved in litigation for which the potential liability is so great that an unfavorable judgement at or near the claimed amount would seriously impair its operations. This is how the company’s attorneys answered the legal confirmation request: “Although no assurance can be given as to the outcome of this action, based on the facts known by us to date, in the confidence of the attorney/ client relationship and otherwise, and our understanding of the present law, we believe the company has good meritorious defense to the claims asserted against it and should prevail.” On this basis, the independent auditor may issue an unqualified opinion. 4. In situations where the auditor has orally discussed matters involving litigation with the client’s legal counsel and obtained his oral opinion on the outcome of disputed matters, it is not necessary to obtain written confirmation of these oral opinions if the auditor has summarized the attorneys’s opinion in a memo to the working papers. 5. For the past 10 years, XYZ Company has used the services of JJH&I for its primary legal advice and in many significant matters of litigation. Ninety-five percent of JJH&I’s was handling litigation involving great potential liability to the company and has now responded to the auditor’s letter of inquiry. If we assume full disclosure, complete reliance can be placed on this response. Required For each case, indicate whether you agree or disagree with the conclusion and the reason(s) therefor.

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