Lesson: Pending Litigation

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo discusses the audit procedures regarding pending litigation and how to determine what should be recorded or disclosed. He explains the auditor's role in inquiring about management's processes for evaluating litigation, obtaining descriptions and evaluations of litigation claims and assessments from management, and reviewing various documents related to litigation. Additionally, communication with the client's legal counsel is addressed, along with potential limitations and issues that may arise, such as confidentiality and attorney-client privilege. The lesson also covers key points of inquiry when the auditor reaches out to the client's legal counsel and provides an example of communication in relation to pending litigation matters.

Updated: June 22, 2023 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Pending litigation. Here we go. We've got contingencies, commitments, that sort of idea here. Taking me into the thought of subsequent events. What are the audit procedures dealing with pending litigation? So we're getting sued, we're suing someone, you can go either way. It could be a gain because we win the lawsuit. It could be a loss because we lose the lawsuit. How do we verify the accuracy of pending litigation? How do we determine what should be recorded or disclosed? Well, first off, we're going to inquire management, their controls for evaluating litigation. If management's controls are just saying, oh, we just assume we're going to win every lawsuit, well, I would raise the red flag. But first off, we're just going to evaluate them as well as a listing of current litigation. Sort of getting an idea first, get an idea of how it works. Then we can obtain from management, a description and evaluation of litigation claims and assessments existing at the balance sheet date. So of these current litigation items, we can go and see what does management expect to happen. Let's get a description of them, understand what's going on. We're obviously going to go talk to the client's lawyer, obtain assurance from management that it has disclosed all unasserted claims that its legal counsel has advised are probable of assertion and must be disclosed. This goes again with contingencies and commitments that we see throughout our end audit here. Has management disclosed every possible lawsuit that will reasonably result in a loss and then also possibly a gain? Review IRS reports and tax returnings, review the board minutes and review the client attorney letter. So whatever communication comes from the attorney. The CPA should ask for the period, probability of the outcome and

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Engagement Planning, Understanding an Entity, & Understanding its Internal Control

Module: 2 Concepts, 36 Lessons

Management's Responsibility for Disclosing Related Parties, Going Concern, Litigation, Estimates, & More Overview

1:09

Management's Responsibility for Disclosing Related Parties, Going Concern, Litigation, Estimates, & More Objectives

4:41

Introduction to Management's Representation and Responsibility

2:56

Reliance on Management Representations