Audit procedures to identify pending litigation?
The AUD section of the CPA exam will test your understanding of how the audit team would identify pending litigation. Pending litigation needs to be accrued for and/or disclosed if certain requirements are met. There are two main procedures the audit team would perform for every audit:
1) Inquire with Management – Performing inquiry with Management is always the first step as Management can provide useful information and direction. While we can’t rely solely on inquiry with Management, this should always be performed first.
2) Send legal letters to client’s legal counsel – This would be performed for every audit, and the audit team would send these legal letters to every external legal counsel that the client has. The audit team would ask that the legal counsel list out all pending litigation, along with any notes on the status, expected outcome, and any penalties.
For the AUD section of the CPA exam, you should be familiar with these two procedures to identify pending litigation. If you are performing an audit, then make sure your audit team performs these procedures!
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