The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1. For each excerpt, double-click the associated shaded cell and select the most appropriate audit response related to the financial statements in the audit response (financials) column. Then, in the audit response (report) column, double-click the associated shaded cell and select whether the auditor's report or the attorney's legal response letter needs to be updated. Each excerpt is independent. Responses may be used once, more than once, or not at all.
The client's year-end is December 31, year 1
The anticipated audit report date is February 15, year 2
All amounts are material to the financial statements
1. Letter dated February 14, year 2: “I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1.”
2. Letter dated January 21, year 2: “I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1.”
3. Letter dated February 26, year 2: “I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss.”
4. Letter dated March 16, year 2: “I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000.”
5. Letter dated January 10, year 2: “I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case was tentatively settled for $35,000, which will be covered by XYZ's insurance carrier.”
6. Letter dated January 20, year 2: “I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, except as follows: L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case was tentatively settled for $35,000.”
Pick from the following choices=
a..Disclosure in footnotes relating to nature of litigation, but no amount disclosed
b.Disclosure in footnotes relating to nature of litigation, including loss amount
c.No impact on financial statement or footnotes
d.Potential litigation settlement accrued in financial statements
e.Potential litigation settlement not accrued in financial statements, amount disclosed in footnote
f.Verify amount due attorney is recorded in financial statements
Pair with one of the below choices 1 to 3
1)Legal response is appropriately dated
2)Update report date
3)Update legal response
For example the first answer could be A-3. These are the kind of simulations that come up in the exam. I had a very similar one.
Through God all things can happen!
“You never fail until you stop trying.”
― Albert Einstein
When I was young, I used to admire intelligent people;as I grow older, I admire kind people.
“Just keep swimming, just keep swimming.”
FAR= 72-84
Audit= 73-82
BEC= 74-75
Reg=77
.
