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Why should the auditor consult with entity's legal counsel?

When an auditor becomes aware of information concerning a possible illegal act, he or she should obtain an understanding of the circumstances of the act by making inquires of management above those involved. Also, the auditor should obtain enough evidence to judge the effect of the act on the financial statements.

If evidence provided by management doesn't convince the auditor that an illegal act has not occurred, why should the auditor consult with the entity's legal counsel?

Solution Preview

The reason to contact the attorney is to confirm with an outside (independent) person about any actions or pending actions which might have an impact on the financial statements. That impact could require recordation of a contingent liability or some kind of disclosure about the probability of such a liability. It also could provide information for a subsequent event disclosure.

Obtaining an 'attorney letter' is fairly standard procedure, ...

Solution Summary

The solution explains all the uses and purposes for contacting the audit client's legal counsel. That which is standard procedure is stated including possible changes or disclosures to a financial statement in progress. For the potential illegal act, the solution recommends how to proceed.

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