cpa audit ch 14 review 5

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  1. would the following statement about litigation, claims, and assessments extracted from a letter from a client’s legal counsel is most likely to cause the auditor to request clarification?

    “I believe that the action can be settled for less than the damages claimed.”
    yes -- The letter of inquiry requests, among other things, that legal counsel evaluate the likelihood of pending or threatened litigation, claims, and assessments. It also requests that legal counsel estimate, if possible, the amount or range of potential loss. Thus, the auditor is concerned about the amount of the expected settlement as well as the likelihood of the outcome. The statement that the action can be settled for less than the damages claimed is an example given in AU-C 501 of an evaluation that is unclear about the likelihood of an unfavorable outcome.
  2. A client is a defendant in a patent infringement lawsuit against a major competitor. Would a evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded be included in legal counsel’s response to the auditor’s letter of inquiry?
    no --- An inquiry letter response from the client’s legal counsel will normally include information or comment about each pending or threatened litigation, claim, or assessment. Legal counsel should (1) address the progress of the case, (2) describe the action the company plans to take, (3) evaluate the likelihood of an unfavorable outcome, and (4) estimate (if possible) the range of any potential loss. Legal counsel does not have the expertise or appropriate information to make a judgment about the client’s ability to continue as a going concern. The auditor normally makes that judgment.
  3. would an auditor most likely perform to obtain evidence about the occurrence of subsequent events the following

    Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.
    yes --- Subsequent events procedures include (1) reading the latest subsequent interim statements, if any; (2) inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters; (3) reading the minutes of meetings of owners, management, and those charged with governance; (4) obtaining a letter of representations from management; (5) inquiring of client’s legal counsel; and (6) obtaining an understanding of management’s procedures for identifying subsequent events.
  4. Would legal counsel’s response to an auditor’s request for information regarding litigation, claims, and assessments will ordinarily contain  the following?

    An explanation regarding limitations on the scope of the response.
    yes --- AU-C 501 indicates that a statement regarding the nature and reasons for any limitation on legal counsel’s response should be requested in the letter of inquiry. The letter is sent to legal counsel requesting confirmation of the information presented.
  5. In evaluating the entity’s plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor what four things
    Mitigating factors include plans to (1) dispose of assets, (2) borrow money or restructure debt, (3) reduce or delay expenditures (e.g., by leasing, not purchasing), or (4) increase equity ownership (AU-C 570).
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cpa audit ch 14 review 5
cpa audit ch 14 review 5
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