Show Shared by the accounting and legal professions IntroductionIf a company or organization is at risk of losing or winning a material lawsuit, then stakeholders should know about it, and transparency is expected. Such outcomes can impact decisions made by readers of an audited financial statement. Readers can range from company owners to capital market participants, such as a financial institution issuing loans, a private equity firm making an investment or regulators providing oversight. With so many interests at stake, accounting firms and law firms adhere to procedures and policies set forth by their professions in regard to the audit confirmation process. For every audit, auditors perform required procedures to determine if existing legal contingencies are fairly presented and properly disclosed in an entity’s audited financial statement. Although disclosure requirements can differ by country or policy setter, the process for gathering information to make a fair assessment is the same throughout the world. The same is true for the external counsel or law firms engaged by companies and organizations subject to an audit. However, differences in laws from country to country, particularly regarding what is considered discoverable vs. not, have lead to variations of policy for responding to auditors’ requests for information. All this considered, auditors continue to seek information from their clients’ legal counsel and do so for the purpose of completing a high-quality audit for all stakeholders. To better understand the process for obtaining information to make an assessment of legal contingencies, a review of the legal confirmation process unbiased to varying accounting disclosure requirements and attorney-client privilege consideration is necessary. The Legal Confirmation Process The process starts with auditors reviewing legal invoices and interviewing company management, including in-house counsel to gain an understanding of potential and in-progress litigation. External counsel or law firms engaged to handle such matters may be contacted by auditors for confirmation of the status of legal matters and potential risk of financial gain or loss. In coordination with the client, auditors prepare an audit inquiry or legal representation letter. The letter is signed by the client, and the auditor must then control delivery of the letter to the law firm. Auditors ask that lawyers respond by their anticipated audit completion date. Once the letter is received, a law firm administrator or paralegal generates a billing report to determine which attorneys have dedicated substantial time to the client during the period under audit and through the anticipated audit completion date. Those lawyers are contacted by the administrator and asked to weigh in for the purpose of an audit response letter. Some law firms have a firm policy of canvassing all attorneys prior to responding to auditors. The firm prepares an audit response letter based on the appropriate attorney’s input. It is common for the law firm and its client to discuss what information will be shared with the auditors. Many firms have an audit letter committee that reviews audit response letters prior to issuance. Finally, the law firm sends the response directly to the auditors, and a copy is sent to the client. The audit response letter is analyzed by the accounting firm and sometimes discussed further with the client. Prior to issuance of the audit opinion, the law firm may be consulted a final time to ensure no further material developments or new issues have arisen. Any disclosures are included in a contingencies or legal matters footnote, and any accruals are reflected in the balance sheet. Risks of the Traditional ProcessThe primary risks of the traditional process are encountered when validation is skipped or auditor control of the process is lost. After the audit inquiry is prepared and signed by the client, auditors must and lawyers should consider these two risks and take steps to reduce or eliminate them.
While validation is required for auditors to maintain professional skepticism in accordance with auditing standards, it is equally as important for law firms. Considering law firms are the keepers of highly confidential information, it is in everyone’s best interest to share such information only with those properly authorized. For this reason, authenticating the accounting firm to which law firms send audit responses is also critical. 2. Auditor Control It is equally as important that auditors receive audit responses directly from law firms. In the event that control is lost, an opportunity for the client to intercept and modify the request or response document exists. If the audit inquiry is intentionally modified by the client, then an accurate assessment of contingencies is not possible by auditors. Not all attorneys are experts in auditing standards, and for that reason, lawyers sometimes unintentionally While a paper-and-mail process endures, technology does offer solutions to these risks. Audit Confirmation Risk ManagementAs a much-needed replacement for a risky and inefficient
paper-and-mail process, in 2009 and 2010, auditing standard-setting bodies approved the use of online confirmations. The advent of online confirmations mitigates audit confirmation risk, offers a streamlined process and has since become the standard for audit confirmations. Online confirmations also brought with Also critically important, through technology, auditors can always maintain control over the confirmation process — this means ensuring auditors control the delivery of the audit inquiry and receipt of the audit response. Below is an audit confirmation best practices workflow emphasizing the importance of validation and auditor control over the confirmation process. Final ThoughtsIt is fair to say auditors and lawyers may not always agree on the standardization of the content of audit inquiries and audit responses; however, the logistics of the audit confirmation process are acceptable and can be adhered to by both accounting and legal professionals. By doing so, all stakeholders, including accounting firms, law firms, clients and capital markets, are better protected. For more information, please visit www.contact.confirmation.com. Who prepares the letter of audit inquiry?26 Audit inquiry letters should be sent to those lawyers, which may be either inside counsel or outside lawyers, who have the primary responsibility for, and knowledge about, particular litigation, claims, and assessments.
What is an audit inquiry letter?A letter of audit inquiry to the client's lawyer is the auditor's primary means of obtaining corroboration of the information furnished by management concerning litigation, claims, and assessments.
Who is responsible for audit process?The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.
How do you respond to an audit query?You fundamentally have three ways of responding:. Agreement and corrective action plan. If you agree with the audit finding, simply say so, then move on with a corrective plan of action. ... . Disagreement. When you disagree with the finding, proceed with caution. ... . No response.. |