Why Does the Auditor Send a Letter to the Client's Lawyer?
Legal contingencies can be difficult to verify solely from internal records, so the auditor seeks relevant external evidence.
Management identifies matters
Management provides information about pending litigation, claims, assessments, and legal counsel.
Legal inquiry
The auditor's inquiry can seek information about the nature, progress, likelihood, and potential exposure of legal matters.
Management authorization
The auditor generally communicates with legal counsel through an authorized process rather than independently contacting counsel without management involvement.
Scope issues
An inability to obtain necessary legal evidence can create a scope problem depending on materiality and circumstances.
Connect to accounting
The auditor evaluates whether litigation is properly accrued and disclosed under applicable accounting standards.
The takeaway
The legal letter supports the auditor's evaluation of litigation accounting and disclosure.
Related Summit guides
FAQ
Does the lawyer decide the accounting treatment?
No.
Can legal evidence affect audit reporting?
Yes.
Is management still responsible for identifying litigation?
Yes.