Name examples of contingencies- Uncertain outcomes of ongoing litigation
- Potential payments related to warrantiesWhat are the procedures for litigation?1. Inquiry of clients
2. Examine client's correspondence with attorneys
3. Review minutes of meetings
4. Review contracts, loan agreements, and correspondence from taxing and governmental agencies
5. Obtain information concerning guarantees from bank confirmations
6. Review documentation related to legal services
7. Legal letter from attorney regarding client's description of litigation, claims, and assessments contained in attorney letterDescribe the process of obtaining attorney's letters1. Auditors initiate request for attorney letter to client
2. Client prepares listing, description, and evaluation of litigation, claims, and assessment for letter (waiving attorney-client privilege) for auditors
3. Auditors send the client's letter to the attorney including information related to litigation, claims, and assessments
4. Attorney responds to auditors regarding the client's description of litigation, claims, and assessments contained in attorney letterWhat is included in attorney's letters?- Listing of pending litigation, claims, and assessments
- Description of each item or case included in the listing
- Evaluation of the likelihood of an unfavorable outcome
- Estimate of the range of potential loss
- Understanding regarding unasserted claimsUnasserted claimsNo formal lawsuit or claim has been filed but circumstances have arisen that could result in a suit or claim being filed in the future
- Only disclosed by attorneys to the auditor if the claim is at least probableWhen do the auditors obtain the attorney's letters?At the end of the audit (within 10 days of the Audit Report)
- Attorneys can provide the most up-to-date information
- Requested by the auditors usually 2 to 3 weeks before issuing the report, but do not want the attorneys to respond too soonWhat is included in written representations?Information related to financial statements and information provided to auditors by management
- Management's responsibility for financial statements and internal controls
- Appropriate disclosure, presentation, and reasonableness of items
- Statement that uncorrected misstatements are immaterialWhen are written representations from management dated?As of the date of the auditor's report
- Events up until this date and includes all subsequent eventsWho is responsible for adjusting the financial statements?The client
- Auditors propose adjustments, but management decides whether to make the adjustmentUncorrected MisstatementIdentified by the auditor that the client has not correctedWhat is a reason that a misstatement remains uncorrected?Materiality or cost/benefit analysis (management's discretion)What do auditors do with misstatements?Accumulate dollar effects of identified misstatements and carry any uncorrected misstatements forward for consideration in future auditsTo whom should the auditors communicate adjustments and misstatements to?The audit committee or individuals charged with governanceWhat is a potential consequence for not correcting/adjusting material misstatements?The auditors may alter the audit report/opinion
