Document ID: chunk:federal_register_of_legislation:F2021C01254:reg:5:p5
Version: federal_register_of_legislation:F2021C01254
Segment Type: reg
Provision Reference: reg 5 (pt 5/11)
Character Range: 17482–20651

from bank confirmations; and

                * enquiries of management and other employees of the entity.

A3.             Audit evidence obtained for purposes of identifying litigation and claims that may give rise to a risk of material misstatement also may provide audit evidence regarding other relevant considerations, such as valuation or measurement, regarding litigation and claims.  ASA 540 establishes requirements and provides guidance relevant to the auditor's consideration of litigation and claims requiring accounting estimates or related disclosures in the financial report.

Reviewing Legal Expense Accounts (Ref: Para. 4(c))

A4.             Depending on the circumstances, the auditor may judge it appropriate to examine related source documents, such as invoices for legal expenses, as part of the auditor's review of legal expense accounts.

Outcome of Litigation and Claims (Ref: Para. 4)

Aus A4.1 The procedures outlined in paragraphs A1‑A4 are methods whereby the auditor can identify both material litigation and claims and legal counsel who have been consulted by the entity.  However, these procedures may not necessarily provide the auditor with sufficient appropriate audit evidence concerning the likely outcome of litigation and claims.  Furthermore, the auditor ordinarily does not possess the skills necessary and is not in a position to make legal judgements concerning the likely outcome of litigation and claims.

Communication with the Entity's Legal Counsel (Ref: Para.5-6)

External Legal Counsel (Ref: Para. 5)

A5.             Direct communication with the entity's external legal counsel assists the auditor in obtaining sufficient appropriate audit evidence as to whether potentially material litigation and claims are known and management's estimates of the financial implications, including costs, are reasonable.

A6.             In some cases, the auditor may seek direct communication with the entity's external legal counsel through a letter of general enquiry.  For this purpose, a letter of general enquiry requests the entity's external legal counsel to inform the auditor of any litigation and claims that the counsel is aware of, together with an assessment of the outcome of the litigation and claims, and an estimate of the financial implications, including costs involved.

A7.             If it is considered unlikely that the entity's external legal counsel will respond appropriately to a letter of general enquiry, for example if the professional body to which the external legal counsel belongs prohibits response to such a letter, the auditor may seek direct communication through a letter of specific enquiry.  For this purpose, a letter of specific enquiry includes:

(a)                A list of litigation and claims;

(b)                Where available, management's assessment of the outcome of each of the identified litigation and claims and its estimate of the financial implications, including costs involved; and

(c)                A request that the entity's external legal counsel confirm the reasonableness of management's assessments and provide the auditor with further information if