The Importance of Attorney Letters in the Audit Process

By: Auditool Team

Within the world of auditing, obtaining adequate and reliable evidence is crucial to support the auditor’s opinions and conclusions. One of the means of obtaining such evidence is through attorney letters. Below, we delve into the purpose, process, and key considerations regarding these letters.

1. Purpose of Lawyer Letters

Attorney letters are instruments that seek to provide the auditor with information about pending or contingent legal matters that may have a significant impact on an entity’s financial statements.

Main reasons to request a lawyer letter:

• Identification of Contingent Liabilities: Ongoing or potential litigation may lead to financial liabilities for the entity. Attorney letters help identify and evaluate these potential liabilities.

• Validation of Revelations: Ensure that the entity has adequately disclosed relevant legal matters in its notes to the financial statements.

• Legal Compliance Evaluation: Determine whether the entity has complied with all applicable regulations and laws.

2. Process of Requesting and Receiving the Lawyer Letter

• Initiative: Although it is the auditor who requests the letter, it is the responsibility of the entity’s management to contact the attorney and request that the letter be sent directly to the auditor.

• Content: The letter should include a description of all pending litigation, claims, and legal matters; an evaluation of the likely outcome; and an estimate of possible financial disbursements or disbursement ranges.

• Date: The attorney letter should be dated as close as possible to the date of the audit report to ensure the relevance and timeliness of the information provided.

3. Key Considerations

• Confidentiality: Given the sensitive nature of legal information, it is critical that both the auditor and the entity handle attorney letters with discretion and respect confidentiality obligations.

• Attorney Limitations: The attorney may not be able to provide a definitive opinion on the outcome of litigation, especially if it is in the early stages.

• Inaccuracies or Discrepancies: If there are differences between what the entity has reported and what the attorney discloses in the letter, the auditor must investigate and resolve these discrepancies.

• Continued Relationship: Establishing a fluid and open relationship between the auditor and the attorney can facilitate a more efficient and effective exchange of information.

Attorney letters represent a valuable tool in the auditor’s arsenal to ensure that financial statements provide a true representation of an entity’s financial position, especially with respect to legal contingencies. By properly understanding their purpose, the process for obtaining them, and key considerations, auditors can effectively use these letters to support their opinions and ensure the integrity of the audit process.