The firm of Cole & Cole, CPAs, is auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2014. On May 6, 2015, C. R. Brown, Consolidated’s chief financial officer, gave the auditors a draft of an attorney letter for Cole’s review before mailing it to J. J. Young, Consolidated’s outside counsel. This letter is intended to elicit the attorneys’ responses to corroborate information furnished to the auditors by management concerning pending and threatened litigation, claims, assessments, and unasserted claims and assessments. Client’s Attorney Letter Request May 6, 2015 J. J. Young, Attorney at Law 123 Main Street, Anytown, USA Dear J. J. Young:
In connection with an audit of our financial statements at December 31, 2014, and for the year then ended, management of the Company has prepared, and furnished to our auditors, Cole & Cole, CPAs, a description and evaluation of certain contingencies, including those set forth below, involving matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf of the Company in the form of legal consultation or representation. Your response should include matters that existed at December 31, 2014. Because of the confidentiality of all these matters, your response may be limited. In November 2014, an action was brought against the Company by an outside salesman alleging breach of contract for sales commissions and asking an accounting with respect to claims for fees and commissions.
The causes of action claim damages of $ 3,000,000, but the Company believes it has meritorious defenses to the claims. The possible exposure of the Company to a successful judgment on behalf of the plaintiff is slight. In July 2014, an action was brought against the Company by Industrial Manufacturing Company (Industrial) alleging patent infringement and seeking damages of $ 20,000,000. On October 16, 2014, the U. S. District Court decided that the Company had infringed on seven Industrial patents and awarded damages of $ 14,000,000.
The Company vigorously denies these allegations and has filed an appeal with the U. S. Court of Appeals. The appeal process is expected to take approximately two years, but there is some chance that Consolidated may ultimately prevail. Please furnish to our auditors such explanation, if any, that you consider necessary to supplement this information, including an explanation of those matters as to which your views may differ from those stated, and an identification of the omission of any pending or threatened litigation, claims, and assessments or a statement that the list of such matters is complete. Your response may be quoted or referred to in the financial statements without further correspondence with you. You also consulted on various other matters considered to be pending or threatened litigation.
However, you may not comment on these matters because publicizing them may alert potential plaintiffs to the strengths of their cases. In addition, various other matters probable of assertion that have some chance of an unfavorable outcome, as of December 31, 2014, are presently considered unasserted claims and assessments.
C. R. Brown
Chief Financial Officer

Describe the omissions, ambiguities, and inappropriate statements and terminology in Brown’s letter. Remember that this is Brown’s letter requesting a response to auditors, but it must request responses in the manner most useful to auditors.

  • CreatedOctober 27, 2014
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