Question

Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to

A) determine the range of probable loss for asserted claims.
B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.
C) obtain an outside opinion of the probability of losses in determining accruals for contingencies.
D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.

Answer 1

Auditors request information from the client's attorneys to obtain professional opinions on the likely outcome and potential liabilities from lawsuits, contributing to determining contingencies and footnote disclosures in financial reporting.

The correct statement is B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.

Step-by-step explanation:

The primary reason auditors request a standard inquiry to be sent to the client's attorney regarding legal matters is to obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs. This information is crucial for auditors as it helps in determining the appropriate accruals for contingencies and the proper footnote disclosure in the financial statements. Legal matters could significantly impact a company's financial position, and the auditor needs to ensure that all such matters are adequately disclosed and provided for.

When the company's attorneys respond to the audit inquiry letter, they supply information that can influence the financial statements and disclosures. This legal insight allows auditors to assess if there is a need for any adjustments to the financial statements for potential losses from any lawsuits or legal disputes. Attorney letters are a critical evidential component, ensuring that the financial reporting is thorough, reflects all material liabilities, and is not misleading to the users of those financial statements.