The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1 (“legal response”). For each excerpt, select the most appropriate financial statement effect and audit response. Each excerpt is independent. Responses may be used once, more than once, or not at all.
a. The client’s year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.

Financial Statement Effect
(1) No impact on financial statement amounts or notes.
(2) Disclosure in notes relating to nature of litigation, but no amount disclosed.
(3) Disclosure in notes relating to nature of litigation, including loss amount.
(4) Potential litigation settlement accrued in financial statements.
(5) Potential litigation settlement not accrued in financial statements, amount disclosed in notes.
(6) Verify amount due attorney is recorded in financial statement amounts.

Audit Response
(7) Legal response is appropriately dated.
(8) Update legal response.
(9) Update audit reportdate.

  • CreatedOctober 27, 2014
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