Question

24-26 In analyzing legal expense for the Boastman Bottle Company, Mary Little, CPA, observes that the company has paid legal fees to three different law firms during the current year. In accordance with her CPA firm’s normal operating practice, Little requests standard attorney letters as of the balances sheet date from each of the three law firms.

On the last day of performing audit procedures, Little notes that one of the attorney letters has not yet been received. The second letter contains a statement to the effect that the law firm deals exclusively in registering patents and refuses to comment on any lawsuits or other legal affairs of the client. The third attorney’s letter states that there is an outstanding unpaid bill due from the client and recognizes the existence of a potentially material lawsuit against the client but refuses to comment further to protect the legal rights of the client.

a. Evaluate Little’s approach to sending the attorney letters and her follow-up on the responses.

b. What should Little do about each of the letters?

Answer 1

a)

Here, Little needs to send the request for letters to those attorneys who are involved in all the legal matters that are concerning the financial statements of the company. Little should not send requests to all the attorneys. The letters should be sent to the attorney when Little has completed its part and Little need to follow up all the responses received specially when it is not satisfactory immediately on the receipt of the letter.
b)

Here the auditor did not receive the first attorney's letter , therefore he should send a second request to get a response
The second letter has no concerns with the financial statement thus it would not require any additional follow-up due to the nature of the work performed by this attorney.
But the third attorney's letter is an important matter of discussion for the auditor . so the auditor, the client and the attorney should discuss and decide the nature of the lawsuit.