The letter of inquiry to the client's attorneys is a request made by client management. Due to attorney-client privilege, the attorney would not be able to respond to such a request made by any other party. Note that management would request the attorney to respond directly to the auditor.
Full Answer
It would not be appropriate, however, for the lawyer to be requested to furnish information in response to an inquiry letter or supplement thereto if it appears that (a) the client has been required to specify unasserted possible claims.
The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with corroboration of the information furnished by management about litigation, claims, and assessments. The auditor evaluates all of the following when testing the entity's fair value measurements and disclosures except
As the lawyer's response is limited to matters involving his professional engagement as counsel, such response should not include information concerning the client which the lawyer receives in another role. In particular,
14 A lawyer may be unable to respond concerning the likelihood of an unfavorable outcome of litigation, claims, and assessments or the amount or range of potential loss, because of inherent uncertainties.
The Association of Corporate Counsel (ACC) is the world's largest organization serving the professional and business interests of attorneys who practice in the legal departments of corporations, associations, nonprofits and other private-sector organizations around the globe.
Client Representation Letter. for Registration Statements. C L I E N T L E T T E R H E A D [Date 20XX] Auditor Attn Auditor Ladies and Gentlemen, This letter is written to you in connection with the prospectus dated XXXXXXX 20XX, filed by [Company Name].
Footnotes (AU Section 337 — Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments): fn 1 This section supersedes the commentary, "Lawyers' Letters," January 1974 (section 1001), and auditing interpretations of section 560.12 on lawyers' letters, January 1975 (section 9560.01-.26). It amends section 560.12(d) to read as follows: "Inquire of client's legal counsel ...
Auditors/Attorney Letters. Lawyers' Responses to Auditors—Some Practical Aspects James J. Fuld, 44(1): 159–67 (Nov. 1988) Each year clients ask their lawyers to advise the clients' auditors about the clients' "contingencies."
A request that the lawyer specifically identify the nature of and reasons for any limitation on his response. Inquiry need not be made concerning matters that are not considered material, provided the client and the auditor have reached an understanding on the limits of materiality for this purpose.
Because the client's prospects in pending litigation may shift as a result of interim developments, and because the lawyer should have an opportunity, if quotation is to be made, to review the footnote in full , it would seem prudent to limit the use of the lawyer's reply letter. Paragraph 7 sets out such a limitation.
.01 This section provides guidance on the procedures an independent auditor should consider for identifying litigation, claims, and assessments and for satisfying himself as to the financial accounting and reporting for such matters when he is performing an audit in accordance with the standards of the PCAOB.
Accordingly, the independent auditor's procedures with respect to litigation, claims, and assessments should include the following: Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments .
Examples of such procedures are as follows: Reading minutes of meetings of stockholders, directors, and appropriate committees held during and subsequent to the period being audited. Reading contracts, loan agreements, leases, and correspondence from taxing or other governmental agencies, and similar documents.
.05 Since the events or conditions that should be considered in the financial accounting for and reporting of litigation, claims, and assessments are matters within the direct knowledge and, often, control of management of an entity, management is the primary source of information about such matters. Accordingly, the independent auditor's procedures with respect to litigation, claims , and assessments should include the following:
.02 Management is responsible for adopting policies and procedures to identify, evaluate, and account for litigation, claims, and assessments as a basis for the preparation of financial statements in conform ity with generally accepted accounting principles.
Question—Section 337.06 requires an auditor to request that the client's management send a letter of inquiry to those lawyers with whom management has consulted concerning litigation, claims, and assessments. Sometimes, the client's inside general counsel or legal department (hereinafter referred to as "inside counsel") is handling litigation, claims, and assessments either exclusive of or in conjunction with outside lawyers. In such circumstances, when does inside counsel's response constitute sufficient, competent evidential matter regarding litigation, claims, and assessments?
"Regarding pending or threatened litigation, claims, and assessments , please include in your response: (1) the nature of each matter, (2) the progress of each matter to date, (3) how the Company is responding or intends to respond (for example, to contest the case vigorously or seek an out-of-court settlement), and (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."
If both inside counsel and outside lawyers have devoted substantive attention to a legal matter, but their evaluations of the possible outcome differ, the auditor should discuss the differences with the parties involved. Failure to reach agreement between the lawyers may require the auditor to consider appropriate modification of his audit report.
In some circumstances, outside lawyers, if used at all, may be used only for limited purposes, such as data accumulation or account collection activity. In such circumstances, inside counsel has the primary responsibility for corporate legal matters and is in the best position to know and precisely describe the status of all litigation, claims, and assessments or to corroborate information furnished by management.
If the lawyer is still unable to give an unequivocal evaluation of the likelihood of an unfavorable outcome in writing or orally, the auditor should look to the guidance in section 508.45 through .49 to determine the effect, if any, of the lawyer's response on the auditor's report.
If the auditor is uncertain as to the meaning of the lawyer's evaluation, he should request clarification either in a follow-up letter or a conference with the lawyer and client, appropriately documented. If the lawyer is still unable to give an unequivocal evaluation of the likelihood of an unfavorable outcome in writing or orally, the auditor should look to the guidance in section 508.45 through .49 to determine the effect, if any, of the lawyer's response on the auditor's report.
Interpretation —The American Bar Association's Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information (ABA Statement) is reprinted as Exhibit II [section 337C] to section 337. While Paragraph 5 of the ABA Statement [section 337C] states that the lawyer "may in appropriate circumstances communicate to the auditor his view that an unfavorable outcome is `probable' or `remote'," he is not required to use those terms in communicating his evaluation to the auditor. The auditor may find other wording sufficiently clear as long as the terms can be used to classify the outcome of the uncertainty under one of the three probability classifications established in FASB Statement No. 5, Accounting for Contingencies [AC section C59]. fn 3
A request that the lawyer specifically identify the nature of and reasons for any limitation on his response. Inquiry need not be made concerning matters that are not considered material, provided the client and the auditor have reached an understanding on the limits of materiality for this purpose.
Because the client's prospects in pending litigation may shift as a result of interim developments, and because the lawyer should have an opportunity, if quotation is to be made, to review the footnote in full , it would seem prudent to limit the use of the lawyer's reply letter. Paragraph 7 sets out such a limitation.
.01 This section provides guidance on the procedures an independent auditor should consider for identifying litigation, claims, and assessments and for satisfying himself as to the financial accounting and reporting for such matters when he is performing an audit in accordance with the standards of the PCAOB.
Accordingly, the independent auditor's procedures with respect to litigation, claims, and assessments should include the following: Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments .
Examples of such procedures are as follows: Reading minutes of meetings of stockholders, directors, and appropriate committees held during and subsequent to the period being audited. Reading contracts, loan agreements, leases, and correspondence from taxing or other governmental agencies, and similar documents.
.05 Since the events or conditions that should be considered in the financial accounting for and reporting of litigation, claims, and assessments are matters within the direct knowledge and, often, control of management of an entity, management is the primary source of information about such matters. Accordingly, the independent auditor's procedures with respect to litigation, claims , and assessments should include the following:
.02 Management is responsible for adopting policies and procedures to identify, evaluate, and account for litigation, claims, and assessments as a basis for the preparation of financial statements in conform ity with generally accepted accounting principles.