Audit Inquiries MCLE Corporate Practice for the Paralegal March 4, 2008

The Role of Audit Inquiries in Preparation of Financial Statements  Audited Financial Statements  Loss Contingencies: FAS 5  Auditing Standards: SAS 12  Conflict with the lawyer’s duty not to disclose confidential client information without consent  The ABA Statement of Policy  The Treaty: established uniform standards reconciling the obligations of auditors and attorneys  Sarbanes Oxley Act of 2002

Recommended Policy for Responding  Adhere to the ABA Statement of Policy  State that the response is in conformity with the ABA Policy  Require a written request by client  Respond only in writing and provide only the types of information contemplated by the ABA Policy  Develop model forms and procedures and use them  Designate lawyers with expertise as reviewers

Procedures  Analyze letter from client  Companies covered  Fiscal period to be covered  Materiality threshold, if any  Request for confirmation regarding consultation with the client regarding unasserted possible claims  Deadline for response  Requests regarding outstanding bills, unbilled time and disbursements

Procedures (continued)  Information requested  Overtly threatened or pending litigation  Identify pending cases  Brief description of nature of litigation  Client position  Procedural status  Avoid judgments as to outcome

Procedures (continued)  Assembling information  Identify client files  Identify attorneys and solicit information from them  Determine effective date of response.  Internal memorandum, 100% response needed  Obtain and review descriptions of loss contingencies  Gather information on status of client’s account

The Audit Response Letter  Use master form wherever possible. It’s an opinion letter  Paralegal role may include preparation of a draft, including descriptions of loss contingencies provided by attorneys, and then submitting the draft for review by the responsible partner and/or reviewing attorney

Updates  Client request  Same procedures  Develop model response for update

Some Common Mistakes  Failure to include the names of all companies when searching for files  Failure to include entire period covered by the audit in determining which attorneys needed to be contacted  Omitting lawyers from the distribution list for the internal memorandum  Marking up the prior year’s response rather than using the current master form

Common Mistakes (continued)  Addressing the response letter to an individual rather than the audit firm  Failing to clarify what companies are covered by the response letter  Omitting either paragraph 5, or if requested in the inquiry letter, paragraph 7 of the K&L Gates Master Form  Specifying an “effective date” later than the “as of” date furnished by your Accounting Department  Omitting any reference to any materiality threshold included in the inquiry letter.

Common Mistakes (continued)  Failing to get responses from all attorneys  Failure to include all loss contingencies reported by the attorneys  Failure to review or edit descriptions of loss contingencies for compliance with the ABA Statement of Policy