Final answer:
Auditors request a legal letter or lawyer's letter from the client's lawyers to assess the risk of material misstatement from pending litigation. This legal confirmation helps ensure that all legal liabilities are appropriately disclosed in the financial statements, which is crucial for accurate financial reporting.
Step-by-step explanation:
When auditors assess the risk of material misstatement from pending litigation, they will request the client send a legal letter to all lawyers who worked for the client during the period under audit. The legal letter, commonly referred to as a legal confirmation or lawyer's letter, is a formal request for information regarding claims and possible litigation involving the client that is sent to the client's attorneys. This is a standard auditing procedure to gain assurance that all potential legal liabilities have been disclosed in the financial statements.
Auditors use the lawyer's letter to corroborate the information provided by management about litigation and to ensure that all contingencies and liabilities have been properly accounted for and disclosed in accordance with accounting principles. This step is vital as undisclosed litigation can have a significant impact on an organization's financial health.