Audit Inquiries

1. Audit Inquiries MCLE Corporate Practice for the Paralegal March 4, 2008

2. The Role of Audit Inquiries in Preparation of Financial Statements • Audited Financial Statements • Loss Contingencies: FAS 5 • Auditing Standards: SAS 12 • Conflict with the lawyer’s duty not to disclose confidential client information without consent • The ABA Statement of Policy • The Treaty: established uniform standards reconciling the obligations of auditors and attorneys • Sarbanes Oxley Act of 2002

3. Recommended Policy for Responding • Adhere to the ABA Statement of Policy • State that the response is in conformity with the ABA Policy • Require a written request by client • Respond only in writing and provide only the types of information contemplated by the ABA Policy • Develop model forms and procedures and use them • Designate lawyers with expertise as reviewers

4. Procedures • Analyze letter from client • Companies covered • Fiscal period to be covered • Materiality threshold, if any • Request for confirmation regarding consultation with the client regarding unasserted possible claims • Deadline for response • Requests regarding outstanding bills, unbilled time and disbursements

5. Procedures (continued) • Information requested • Overtly threatened or pending litigation • Identify pending cases • Brief description of nature of litigation • Client position • Procedural status • Avoid judgments as to outcome

6. Procedures (continued) • Assembling information • Identify client files • Identify attorneys and solicit information from them • Determine effective date of response. • Internal memorandum, 100% response needed • Obtain and review descriptions of loss contingencies • Gather information on status of client’s account

7. The Audit Response Letter • Use master form wherever possible. It’s an opinion letter • Paralegal role may include preparation of a draft, including descriptions of loss contingencies provided by attorneys, and then submitting the draft for review by the responsible partner and/or reviewing attorney

8. Updates • Client request • Same procedures • Develop model response for update

9. Some Common Mistakes • Failure to include the names of all companies when searching for files • Failure to include entire period covered by the audit in determining which attorneys needed to be contacted • Omitting lawyers from the distribution list for the internal memorandum • Marking up the prior year’s response rather than using the current master form

10. Common Mistakes (continued) • Addressing the response letter to an individual rather than the audit firm • Failing to clarify what companies are covered by the response letter • Omitting either paragraph 5, or if requested in the inquiry letter, paragraph 7 of the K&L Gates Master Form • Specifying an “effective date” later than the “as of” date furnished by your Accounting Department • Omitting any reference to any materiality threshold included in the inquiry letter.

11. Common Mistakes (continued) • Failing to get responses from all attorneys • Failure to include all loss contingencies reported by the attorneys • Failure to review or edit descriptions of loss contingencies for compliance with the ABA Statement of Policy