Question

1. Auditors are concerned with the existence of loss contingencies that may affect the client's financial statements. One way that the auditors obtain evidence about existing loss contingencies is through the lawyer's letter.

1. Describe the information that the auditors wish to obtain about the litigation being handled by a lawyer.
2. Describe three other procedures that are used by auditors to discover existing loss contingencies.

Answer 1

a. The auditors wish to obtain the following information about litigation:

1. A explanation of the litigation condition and the accounting period to which it pertains,

2. The assessed amount of loss, and

3. The likelihood of happening of the loss.

b. Other measures used by auditors to identify loss eventualities comprise (only three required):

• Review the minutes of directors' meetings.

• Review correspondence with financial institutions.

• Obtain a representations letter from the client.

• Review prior tax returns.