11 When legal matters have been identified or when the auditor believes they may exist, the auditor shall endeavour to obtain written representations from all lawyers with whom management has consulted on material legal matters.
12 Written representations are obtained from the entity’s lawyers in order to evaluate the reasonableness of management’'s estimates of the likely financial settlement of legal matters, and to corroborate the completeness of the legal matters identified by management. The completeness of the response obtained is likely to depend on the individual lawyer and the size and complexity of the lawyer’s firm, and it may be necessary for further audit procedures to be undertaken in order to obtain sufficient appropriate audit evidence on which to base the audit opinion.
13 The auditor shall request management to prepare the representation letter to the entity’s lawyers, with a request that the lawyers responds directly to the auditor. The auditor shall send the representation letter to the entity’s lawyers..
14 The representation letter would ordinarily be prepared on the entity’'s letterhead.
15 The matters that would ordinarily be covered in the representation letter to the entity’s lawyers include, but would not necessarily be limited to, the following:
identification of the name and the end of the reporting period of the entity and all other entities to which the einquiry relates, for example subsidiaries and incorporated joint ventures;
a list prepared by management which names each entity subject to a legal matter, describes the nature of each legal matter and its status;
management’'s evaluation of the probable outcome and estimate of the financial settlement (inclusive of costs and disbursements) for each legal matter in respect of which a lawyer has been engaged by the entity;
a request that the entity’s lawyers advise whether the items are properly described and the evaluations are reasonable;
a request for comment on those legal matters on which the entity’s lawyers disagrees with management;
a list of open files maintained by the entity’s lawyers in relation to the entity;
a request that the response be provided on a specified date which would be as close as possible to the expected date of the audit report; and
a request that the entity’s lawyers advise the nature of and reasons for any limitation on the response.
16 An example representation letter to a lawyer is included in Appendix 1.
17 An auditor may in some cases request that management send a request for a representation letter to the entity’s lawyers who are not identified as currently handling the entity’'s legal matters. For example when the entity has changed lawyers on a particular matter, or when a lawyer engaged by the entity has resigned, the auditor would consider the need for enquiries concerning the reasons for the change or resignation.
Section Requests for Representation Letters from - ASA 508 - Enquiry Regarding Litigation and Claims - April 2006 - Requests for Representation Letters from Lawyers | Zoe
Employee and/or Third Party Lawyers
18 Where lawyers who are employees of the entity have the primary responsibility for legal matters and are in the best position to corroborate management’'s representations, the auditor shall endeavour to obtain a representation letter, seeking information similar to that sought from a third party lawyer, from those employees.
19 Before relying on the opinion of either an employee lawyer or a third party lawyer, care must be exercised to ensure that conditions prevail which would make such reliance reasonable. For the applicable mandatory requirements and explanatory guidance on using the work of an expert, refer to ASA 620 Using the Work of an Expert.
20 If both employee and third party lawyers are involved in advising the entity on the same legal matter, the auditor would ordinarily seek a written representation letter from the lawyer with the primary responsibility for that matter. However, there may be circumstances where the employee lawyer has primary responsibility, but the matter has involved substantial participation by a third party lawyer, and is of such significance that the auditor would consider obtaining a written representation letter from the third party lawyer that their opinion does not differ materially from that of the employee lawyer.
21 In circumstances where both employee and third party lawyers have devoted substantial attention to a legal matter involving the entity and primary responsibility rests with the third party lawyer, evidence obtained from an employee lawyer is not an adequate substitute for any information that a third party lawyer may refuse to furnish, in which case, the procedures outlined in paragraphs 22 to 30 would ordinarily be followed.
Lawyer’s Response
22 If the a response from the entity’s lawyers containss a material disagreement with management’'s original evaluation of a particular matter, the auditor shall seek discussions with management and the entity’s lawyers, unless management subsequently agrees with the lawyer’s’ evaluation.
23 If the disagreement is resolved after discussions, the auditor would ordinarily request that the entity’s lawyers confirm in writing to the auditor the reasonableness of the details as resolved.
24 If the disagreement is not resolved, the auditor would ordinarily prepare a memorandum of the discussion and seek written confirmation from management and the entity’s lawyers that it is an accurate record of the discussion. In conjunction with evidence from other audit procedures, the auditor, under ASA 701 Modifications to the Auditor’s Report, needs to consider the effect of such disagreement on the auditor’s report.
25 If the response from the entity’s lawyers contains information that requires clarification, the auditor would ordinarily make further enquiries of management and the entity’s lawyers, as appropriate, and request clarification in writing.
Lawyer’s Inability to Respond Comprehensively or Limitations in a Response
26 If a response is not received from the entity’s lawyers, or the response received is incomplete, the auditor would ordinarily consider:
(a) requesting management to contact the entity’s lawyers to either seek a complete answer to the original request, or an explanation for the lack of, or limitation in, a response, which ought to be sent directly to the auditor; or
(b) making arrangements to discuss with management or the entity’s lawyers the reasons for the lack of, or limitation in, a response.
27 Due to the following circumstances it may be difficult to either obtain a representation letter or be provided with information about legal matters from the entity’s lawyers:
(a) If the entity is involved in litigation, or litigation is anticipated or contemplated, relevant information about legal matters may be subject to legal professional privilege. Disclosure of this information in the representation letter, directly to the auditor for the purposes of the audit of the entity’s financial report, is not privileged. This may cause legal professional privilege attaching to the entity’s communications with its lawyers to be compromised, as information in the representation letter might become discoverable in litigation proceedings.;
(b) Factors influencing the outcome of a legal matter may sometimes not be within the a lawyer’s’ competence to judge, for example where there is no relevant or historical experience of the entity or other entities in similar matters, or where the litigation is at an early stage.; and
(c) Due to material uncertainties, the entity’sa lawyers may be is unable to form a conclusion to corroborate management’'s representations regarding outstanding legal matters.
28 Where the auditor has not obtained sufficient appropriate audit evidence as to a material financial report assertion regarding legal matters, under ASA 330 The Auditor’’s Procedures in Response to Assessed Risks, the auditor needs to consider whether alternative audit procedures can provide further audit evidence. Alternative audit procedures may include:
(a) further enquiries of management or those charged with governance, about for instance the processes, procedures and assumptions they implement, adopt or make to ensure legal matters are recognised and disclosed in accordance with the applicable financial reporting framework;
(b) where possible, making arrangements to discuss legal matters with management and the entity’s lawyer;
(c) reviewing documents in management’'s possession concerning legal matters, including the entity’s bBoard minutes; and
(d) examining accounts rendered by the entity’s third party lawyers.
29 The auditor may also consider any relevant legislation to assist in obtaining information about legal matters, including:
Section 310 of the Corporations Act 2001 for example, entitles the auditor to a right of access at all reasonable times to the books of a company registered scheme and disclosing entity, and may require from any officer information, explanations and other assistance for the purposes of the audit or review.
When the entity is a disclosing entity, whether disclosure of any legal matters has been made in accordance with the continuous disclosure requirements under section 674 or 675 of the Corporations Act 2001.
30 Under ASA 230 Audit Documentation, the auditor needs to prepare sufficient appropriate audit documentation regarding the alternative audit procedures performed., the auditor ordinarily records details of alternative audit procedures performed.
Audit Reporting Considerations
31 A limitation on the scope of the auditor’s work exists when:
(a) management refuses to respond to the auditor’s request that they prepare the representation letter to the entity’s lawyers;
(b) management does not allow the auditor to communicate with the entity’s lawyer; or
(c) the auditor has been unable to obtain sufficient appropriate audit evidence from performing alternative audit procedures.
Accordingly, under ASA 701 Modifications to the Auditor’s Report, the auditor needs to consider the effect on the auditor’s report.
32 In those circumstances where, due to material uncertainties, athe entity’s lawyers are is unable to form a conclusion to corroborate management’'s representation, under ASA 701 the auditor needs to consider the effect on the auditor’s report arising from the extent of disclosure of the material uncertainty in the financial report. Under ASA 701:
(a) where the auditor considers that the disclosure of the material uncertainty in the financial report is adequate the auditor needs to include an emphasis of matter section; or
(b) if in the auditor’s opinion the disclosure of the material uncertainty is inadequate or unreliable, a modified opinion needs to be expressed on the basis of a disagreement with management.