AICPA Exam CPA-Auditing Topic 3 Question 26 Discussion

Choice 'd' is correct. The auditor should obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

Choice 'a' is incorrect. The auditor should examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. The auditor does not generally examine documents held by the client's lawyer.

Choice 'b' is incorrect. If the lawyer has indicated that there is a high probability of a litigation, claim, or assessment being resolved unfavorably, the auditor would use this information, together with an estimate of the range of potential loss (if available), to evaluate management's financial statement presentation.

The auditor would not generally discuss with the client's lawyer its defense philosophy regarding such matters.

Choice 'c' is incorrect. It is the auditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments have been adequately recorded or disclosed in the financial statements.