Question

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.

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

Answer 1

Auditors obtain information about litigation from a lawyer's letter, reviewing organizational minutes, examining contracts and government correspondence, and discussing management's litigation policies to identify potential loss contingencies affecting financial statements.

Step-by-step explanation:

Auditors seek to obtain specific information about litigation through a lawyer's letter. This includes details about the nature of the litigation, the progress of the case, the likelihood of an unfavorable outcome, and the amount or range of potential financial loss. The primary purpose is to assess the impact of these potential loss contingencies on the client's financial statements.

Aside from the lawyer's letter, auditors use other procedures to uncover existing loss contingencies. These include:

1. Reviewing the minutes of meetings of the board of directors, committees, and shareholders for indications of potential losses.
2. Examining contracts, loan agreements, and correspondence from government agencies, which may reveal potential liabilities.
3. Discussing with management their policies and procedures for identifying and handling litigations and claims.

These procedures are integral to an auditor's due diligence and assist in ensuring that all significant loss contingencies are identified and appropriately disclosed in the financial statements.