The Accounting and Auditing Policy Committee (AAPC) 

was organized in May 1997 by the Office of 

Management and Budget (OMB), the General 

Accounting Office (GAO), the Department of the Treasury, the 

Chief Financial Officers’ Council (CFO). and the President’s 

Council on Integrity and Efficiency (PCIE), as a new body to 

research accounting and auditing issues requiring guidance. 

The mission of the AAPC is to assist the Federal Government 

in improving financial reporting through the timely 

identification, discussion, and recommendation of solutions to 

accounting and auditing issues within the framework of existing 

authoritative literature. 

The AAPC serves as a permanent committee sponsored by the 

Federal Accounting Standards Advisory Board (FASAB). The 

mission of the FASAB is to recommend accounting standards 

to the FASAB principals after considering the financial and 

budgetary information needs of congressional oversight groups, 

executive agencies, and the needs of other users of Federal 

financial information. 

The AAPC is intended to address issues which arise in 

implementation which are not specifically or fully discussed in 

FASAB standards, interpretations of FASAB standards, OMB’s 

Form and Content Bulletin, or OMB’s Audit Bulletin. The 

AAPC’s guidance on accounting will be cleared by FASAB 

before a recommendation is forwarded to OMB for publication. 

The AAPC’s guidance on audit issues will be cleared by OMB 

and GAO before being published by OMB. 
Issue: 

Who should be the source of audit legal letters in cases where 

Department of Justice attorneys are handling legal matters on behalf of other 

Federal reporting entities? 

Background: 

This issue was raised by the Department of Justice (DOJ) in relation to 

Interpretation No. 2, Accounting for Treasury Judgment Fund Transactions, 

issued by the Federal Accounting Standards Advisory Board (FASAB); 

however, it is applicable to any situation where outside legal counsel is 

handling legal matters on behalf of a Federal reporting entity. 

FASAB Interpretation No. 2 states that “the Federal entity’s 

management, as advised by the Justice Department, must determine whether 

it is probable that a legal claim will end in a loss for the Federal entity and 

the loss is estimable.” DOJ is concerned that the language in the 

Interpretation will lead agencies to conclude that DOJ is the sole source of 

audit legal letters in cases where DOJ attorneys are handling legal matters on 

behalf of other Federal reporting entities. 

Recommended Implementation Guidance: 

Management of the Federal reporting entity is responsible for adopting 

policies and procedures to identify, evaluate and account for litigation, 

claims and assessments as a basis for the preparation of financial statements 

in accordance with the requirements of the Chief Financial Officers Act of 

1990 and the Government Management Reform Act of 1994. These include 

litigation, claims and assessments handled by legal counsel outside of the 

Federal reporting entity’s legal department. 

Management of the Federal reporting entity is responsible for ensuring 

that loss contingencies, including those arising from litigation, claims and 

assessments, are presented in the financial statements in accordance with the 

requirements of Statement of Federal Financial Accounting Standards No. 5, 

Accounting for Liabilities of the Federal Government. This may require 

consultation by management and its legal department with DOJ, as well as 

other outside legal counsel, to ensure the accuracy and completeness of the 

presentation of matters related to litigation, claims and assessments in the 

Federal reporting entity’s financial statements. Such consultation may include 

requesting a list of pending litigation, claims and assessments from DOJ or 

other outside legal counsel. 

Audit Legal Letter Guidance 1 
A letter from legal counsel to the auditor, in response to a letter of audit 

inquiry from management to legal counsel, is the auditor’s primary means of 

corroborating the information furnished by management concerning the 

accuracy and completeness of litigation, claims and assessments. The auditor 

should request that management send a letter of audit inquiry to legal 

counsel with whom management has consulted concerning litigation, claims 

and assessments. A materiality limit for the legal letter is generally 

established in the letter of audit inquiry, based on an understanding between 

management and the auditor. 

Management of the Federal reporting entity and its legal department are 

responsible for providing the auditor with a legal letter. The legal letter 

should cover all litigation, claims and assessments pertaining to the Federal 

reporting entity, including matters handled by DOJ or other outside legal 

counsel on behalf of the Federal reporting entity. 

The legal letter provided to the auditor by the Federal reporting entity’s 

legal department, or “inside counsel”, may provide sufficient evidential 

matter for the auditor. In certain circumstances the auditor may also need 

supporting legal representation from outside counsel. Section AUI 337.26 of 

the AICPA Codification of Statements on Auditing Standards provides the 

following guidance for situations where inside counsel is handling litigation, 

claims and assessments either exclusive of or in conjunction with outside 

counsel: 

Audit inquiry letters should be sent to those lawyers, which may

be either inside or outside lawyers, who have the primary 

responsibility for, and knowledge about, particular litigation, 

claims and assessments. If inside counsel is handling litigation, 

claims and assessments exclusively, their evaluation and 

response ordinarily would be considered adequate. Similarly, if 

both inside and outside lawyers have been involved in the 

matters, but inside counsel has assumed primary responsibility

for the matters, inside counsel’s evaluation may well be 

considered adequate. However, there may be circumstances 

where litigation, claims and assessments involving substantial 

overall participation by outside lawyers are of such significance 

to the financial statements that the auditor should consider 

obtaining the outside lawyers’response that they have not 

formulated a substantive conclusion that differs in any material 

respect from inside counsel’s evaluation, even though inside 

counsel may have primary responsibility. 

2 Audit Legal Letter Guidance 
In those circumstances where the auditor determines that a legal letter is 

needed from DOJ, or other outside legal counsel, to support the Federal 

reporting entity’s legal letter, the Federal reporting entity’s management, in 

conjunction with its legal department, would request such representation in a 

letter of audit inquiry. The Federal reporting entity would provide DOJ with 

its description and evaluation of the possible outcome of the case in question, 

and request that the DOJ lawyer respond directly to the auditor. If the 

Federal reporting entity is not sufficiently knowledgeable of the case to 

provide a description and evaluation, the DOJ lawyer would be requested to 

provide a description and evaluation directly to the auditor. Such requests to 

DOJ should be case specific and directed to the lead DOJ lawyer handling 

the case. To meet the reporting deadlines for audited financial statements, 

there should be early coordination between the auditor and the Federal 

reporting entity’s management and legal department to determine whether 

supporting legal representations will be needed from DOJ. 

The legal letter provided to the auditor by the legal department of the 

Federal reporting entity requires an assertion as to the completeness of the 

list of litigation, claims and assessments, including matters handled by DOJ 

or other outside legal counsel on behalf of the Federal reporting entity. The 

auditor’s consideration of this completeness assertion is based primarily on 

the assessed effectiveness of the Federal reporting entity’s internal control 

structure for identifying, evaluating and accounting for litigation, claims and 

assessments. The auditor also may need to request additional information 

from the Federal reporting entity, or DOJ or other outside legal counsel, to 

obtain evidence about the completeness assertion. Such requests to DOJ or 

other outside legal counsel should be made through management of the 

Federal reporting entity. Further, the auditor should consider whether the 

audit scope is limited by the inability to obtain sufficient competent 

evidential matter regarding the completeness assertion for litigation, claims 

and assessments. 

References: 

Interpretation of Federal Financial Accounting Standards No. 2, Accounting for 

Treasury Judgment Fund Transactions 

Statement of Federal Financial Accounting Standards No. 5, Accounting for Liabilities 

of the Federal Government 

AICPA Codification of Statements on Auditing Standards, AU Section 337, Inquiry of 

a Client’s Lawyer Concerning Litigation, Claims and Assessments; and Auditing

Interpretations of AU Section 337 

Audit Legal Letter Guidance 3 
4 Audit Legal Letter Guidance