Annual Audit Manual

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7541 Identify and assess completeness of litigation and claims
Jun-2020

In This Section

Introduction

Identify and assess completeness of litigation and claims

Overview

This topic explains:

  • The objective of the auditor with regard to litigation and claims;
  • Procedures performed to identify litigation and claims;
  • Obtaining written representations regarding litigation and claims.
Introduction

CAS Objective

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the completeness of litigation and claims involving the entity. (CAS 501.3(b))

OAG Guidance

Litigation and claims that an entity is subject to may impact amounts reflected or disclosed in the entity’s financial statements.

OAG Audit 7541 and OAG Audit 7542 contain audit requirements and guidance for identifying and assessing the completeness of litigation and claims within the context of obtaining sufficient and appropriate audit evidence to opine on the entity’s financial statements.

Identify and assess completeness of litigation and claims

CAS Requirement

The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: (CAS 501.9)

(a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;

(b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and

(c) Reviewing legal expense accounts.

CAS Guidance

Litigation and claims involving the entity may have a material effect on the financial statements and thus may be required to be disclosed or accounted for in the financial statements (CAS 501.A17).

In addition to the procedures identified in paragraph 9, other relevant procedures include, for example, using information obtained through risk assessment procedures carried out as part of obtaining an understanding of the entity and its environment to assist the auditor to become aware of litigation and claims involving the entity (CAS 501.A18).

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. CAS 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 statements (CAS 501.A19).

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 (CAS 501.A20).

OAG Guidance

Additional information (e.g., ongoing compliance with terms and conditions of significant contracts, default clauses, amendments to significant contracts, accounting implications) relating to litigation and claims may be obtained when performing procedures related to other aspects of the audit, including:

  • Review of significant contracts, leases, loan agreements, guarantees, and similar documents, including related correspondence (See OAG Audit 7570).

  • Review of bank and other confirmations (See OAG Audit 7050).

We may also consider industry and other developments, particularly with respect to lawsuits or governmental actions that may have industry wide significance, and make appropriate inquiries when events unfavorable to the entity's competitors may eventually apply to the entity.