Concepts and Standards - Lawyer's Letter

Question 1

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?

Answer 1

“I believe that the action can be settled for less than the damages claimed.”

Why?

This is unclear as to the details of the attorney’s belief.

Note:

“I believe that the possible liability to the company is nominal in amount.”

“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.”

• These Responses are clearly interpreted by the auditor

Question 2

Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide

Answer 2

Corroborative audit evidence.

Why?

letter of audit inquiry to the client’s lawyer is the auditor’s primary means of obtaining corroboration of the information furnished by management concerning litigation, claims, and assessments.

Question 3

What procedures would an auditor most likely perform regarding litigation?

Answer 3

Discuss with management its policies and procedures for identifying and evaluating litigation.

Question 4

“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)

Answer 4

Audit inquiry letter to legal counsel.

Question 5

An auditor will ordinarily examine invoices from lawyers primarily in order to

Answer 5

Identify possible litigation, claims, and assessments.

Question 6

Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?

Answer 6

Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.

Note:

CPA does not confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.

Question 7

An auditor should obtain audit evidence relevant to all the following factors concerning third-party litigation against a client except the

Answer 7

Jurisdiction in which the audit evidence will be resolved.

Question 8

An auditor would be most likely to identify a contingent liability by obtaining a(n)

Answer 8

Lawyer’s letter.

Note:

Lawyers often address contingent liabilities relating to their clients.

Question 9

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

Answer 9

Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

Question 10

What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?

Answer 10

Reviewing the response from the client’s lawyer to a letter of audit inquiry.

Question 11

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?

(basically this question is asking what in hear would cause the auditor to ask for clarification on a statement that the lawyer state)

Answer 11

“I believe that the plaintiff will have problems establishing any liability.”

Why?

This statement is unclear and does not help the auditors to determine whether such legal matters have been properly reported.

Question 12

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?

Answer 12

Read the file of correspondence from taxing authorities.

Question 13

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

Answer 13

Undisclosed unasserted claims may have arisen.

The auditor should inquire why the attorney resigned. The auditor’s concern is whether any undisclosed unasserted claims have arisen. Per AU-C 501, a lawyer may be required to resign if his advice concerning reporting for litigation, claims, and assessments is disregarded by the client.

Question 14

The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to provide the auditor with

Answer 14

Corroboration of the information furnished by management about litigation, claims, and assessments.

Question 15

The letter of audit inquiry addressed to the client’s legal counsel will not ordinarily be

Answer 15

Limited to references concerning only pending or threatened litigation with respect to which the lawyer has been engaged.

Question 16

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?

Answer 16

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

Why?

This answer is correct (least likely) because the auditor, not the attorney, makes a judgment on going concern status.

Question 17

In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?

Answer 17

Read the minutes of the board of directors’ meetings.

Why?

because reading the minutes of board of directors’ meetings may reveal contingent liabilities such as litigation facing the firm, or other possible losses.

Question 18

An attorney responding to an auditor as a result of the client’s letter of audit inquiry may appropriately limit the response to

Answer 18

Matters to which the attorney has given substantive attention in the form of legal consultation or representation.

Question 19

A lawyer’s response to an auditor’s request for information concerning litigation, claims, and assessments will ordinarily contain which of the following?

Answer 19

An explanation regarding limitations on the scope of the response.

Note:

The lawyer will appropriately limit the response to matters which he has given substantive attention to, and to matters that are considered material to the financial statements. These limitations are not limitations on the scope of the auditor’s examination.

Question 20

A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

Answer 20

The auditor and the client’s management.

Question 21

The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is a

Answer 21

Letter of audit inquiry to the client’s lawyer.

Why?

This answer is correct because a letter of audit inquiry to the client’s lawyer is the auditor’s primary means of obtaining corroboration of the information furnished by management concerning litigation, claims, and assessments.