Litigation and claims
ISA 501 Audit Evidence - Additional Consideration for exact Items requires such auditors should carry our process to become aware of any material litigation or claims including the entity. That procedure would involve:
(i) Make suitable enquiries of management involving obtaining representations
(ii) Examine management and board minutes for indications of possible claims
(iii) Examine correspondence along with lawyers involving bills rendered
(iv) Examine legal expense account
(v) Receive a list of matters refereed t lawyers along with the company's estimates of possible liabilities
(vi) Review the client's system of recording claims involving the process for bringing them to the attention of management.
Whenever litigation or claims have been well known or wherever the auditor believes that they may exist, the auditor should seek direct contact along with the entity's lawyers.
The letter should be prepared through management and sent through the auditor. It should identify the litigation and management's assessment of the outcome, and request such the lawyer verify directly to the auditor the reasonableness of the statement and to give the auditor along with further information whether the list is incomplete. Whether the lawyer is probable to respond to a more common enquiry, after that would be better lawyers are usually unwilling to do this unless there is nothing to report.
In complex condition the auditor may require to meet the lawyer, along with the client's permission and preferably along with the client in attendance. Wherever permission to communicate along with lawyers is refused, a qualified audit opinion will usually follow.