ACCO 465 Lecture Notes - Lecture 9: Contingent Liability, Audit Evidence, Costs In English Law
4 Jul 2019
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Prepared by: Prof. Audousset-Coulier
Update: Fall 2017
1
ACCO 465 – Teaching notes – Lecture 9
Completing the audit
Readings: Chapter 15 + part of Chapter 16 (see details in the course outline)
1. Audit procedures for contingent liabilities
The auditor needs to obtain information about:
The nature of the contingent liability,
The amount (is it significant? can we estimate it?)
Assess the likelihood of the outcome
Nature of the potential disclosures needed.
Main sources of audit evidence:
Inquiry of management
Inquiry of client in-house legal department (if applicable)
Review minutes of shareholders’ and directors’ meetings
Read contracts, agreements, and related correspondence
Review correspondence with CRA
Analyze legal expense account and review related invoices
Legal confirmations
Legal Confirmation = letter of inquiry to client’s lawyers (SB: “lawyer’s letters”)
Obtain confirmations from all major law firms performing legal services for the client
Objective: gather evidence about the expected outcome of existing lawsuits and potential
pending litigation
Two categories of lawsuits
Outstanding (or asserted) claim: Client has been notified of the suit or the suit has already
been filed
Possible (or un-asserted) claim: The client is aware of a situation that could lead to a claim.
Prepared by: Prof. Audousset-Coulier
Update: Fall 2017
2
Specific format for legal confirmations:
CAS 501: In Canada, the method of communication with the entity's external legal counsel
(law firms) regarding claims and possible claims in connection with the preparation and
audit of financial statements is guided by the “Joint Policy Statement of January 1978
approved by The Canadian Bar Association and the Auditing and Assurance Standards
Board”. This Joint Policy Statement is appended to CAS 501 (with templates for inquiry and
response letters).
Inquiries:
- prepared on the client’s letterhead with a company’s official signature
Includes:
- a list prepared by management of outstanding and possible claims
- A description of the nature, current status and management’s evaluation of the amount
and likelihood of loss for claims and possible claims.
- A request that the lawyer reply to the client with a signed copy to the auditor, advising
whether the management description and evaluations of the outstanding and possible
claims are reasonable.
- The letter informs the lawyer that the client (auditee) waives the privilege of
confidentiality* and gives the lawyer permission to give information to the auditor.
* Every lawyer has a duty to hold in strict confidence all information acquired in the course of the professional
relationship concerning the business and affairs of a client and may not divulge any such information unless
expressly or impliedly authorized by the client or required by law to do so. The client has the privilege of denying
third parties access to communications between the client and the client's law firm. The response letter (to legal
confirmations) is a privileged and confidential communication requested by the client and given to the client and
the client's auditor in connection with the preparation and audit of the financial statements. The auditor's
professional responsibility not to divulge information concerning a client's affairs without the client's consent
applies to the response letter. It must not be quoted from or referred to in the financial statements or be furnished
in whole or in part to any other party without prior written consent of the law firm.
Responses
- The law firm shall specify in the response letter any claim identified in its records which
is OUTSTANDING and which is omitted from the inquiry letter
- Lawyers do not need to identify omissions of POSSIBLE claims
- The auditor needs to obtain a letter of representation from management that it has
disclosed all known and possible claims
- If management or lawyer fail to provide adequate information about lawsuit
contingencies, it can be considered a scope limitation if the auditor cannot obtain
sufficient appropriate audit evidence by other means (alternative audit procedures).
