AUDIT CORRESPONDENCE—PRACTICAL APPLICATIONS OF
CLARIFIED AUDITING STANDARDS
By Larry L. Perry, CPA
CPA Firm Support Services, LLC
LEARNING OBJECTIVES
 To understand the requirements of the Clarified Auditing Standards pertaining to
certain audit correspondence in AU-C Sections 210, 260, 505, 580 and 501
(Lawyers Letters)
 To learn practical ways to perform procedures and apply the requirements
pertaining to certain audit correspondence
 To conduct appropriate audit procedures and prepare audit correspondence
including:
o Engagement letters
o Written communications to persons charged with governance
o Accounts receivable confirmations
o Management representation letters
o Internal control letters
o Lawyers letters
INTRODUCTION
These materials focus on the following Clarified Auditing Standards:
 AU-C Section 210, Terms of Engagements
 AU-C Section 260, The Auditor’s Communication with Those Charged with
Governance
 AU-C Section 505, External Confirmations
 AU-C Section 580, Written Representations
 AU-C Section 265, Communicating Internal Control Related Matters Identified in
an Audit
 AU-C Section 501, Audit Evidence—Specific Considerations for Selected Items
(Litigation, claims and assessments involving the entity)
Summaries of each of the above standards will be presented below, followed by
discussions of practical application issues. Illustrative examples of the correspondence
required by these standards will also be included.
TERMS OF ENGAGEMENT (AU-C Section 210)
Objective of the auditor
The auditor’s objective is to accept an audit engagement for a new or existing audit client
only when the basis upon which it is to be performed has been agreed upon through:
 Establishing whether the preconditions for an audit are present and
1
 Confirming that a common understanding of the terms of the audit engagement
exists between the auditor and management and, when appropriate, those charged
with governance.
Definitions
 Preconditions for an audit. The use by management of an acceptable
financial reporting framework in the preparation of the financial statements
and the agreement of management and, when appropriate, those charged with
governance, to the premise on which an audit is conducted.
 Recurring audit. An audit engagement for an existing audit client for whom
the auditor performed the preceding audit.
Requirements
 Preconditions for an audit—covers whether the preconditions for an audit are
present which include:
o Determining whether the financial reporting framework to be applied in
the preparation of the financial statements is acceptable
o Obtaining the agreement of management that it acknowledges and
understands its responsibility for:

The preparation and fair presentation of the financial statements
in accordance with the applicable financial reporting
framework;

The design, implementation, and maintenance of internal
controls relevant to the preparation and fair presentation of
financial statements that are free from material misstatement,
whether due to fraud or error; and

To provide the auditor with:
 Access to all information of which management is aware
that is relevant to the preparation and fair presentation of
the financial statements, such as records, documentation,
and other matters;
 Additional information that the auditor may request
from management for the purpose of the audit; and
 Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain audit
evidence.
2
 Management-imposed limitation on scope prior to audit engagement
acceptance that would result in a disclaimer of opinion. If this entity:
o Imposes a scope limitation on the auditor such that the auditor believes
the limitation will result in the auditor disclaiming an opinion on the
financial statements as a whole, the auditor should not accept such a
limited engagement as an audit engagement.
o However if the entity is required by law or regulation to have an audit
and it imposes such a scope limitation and a disclaimer of opinion is
acceptable under the applicable law or to the regulator, the auditor is
permitted, but not required, to accept the engagement.
 Other factors affecting audit engagement acceptance
o If the preconditions for an audit are not present, and the auditor is not
required by law or regulation to accept the proposed audit engagement,
the auditor should discuss the matter with management and decline to
accept the proposed engagement.
o If the auditor has determined that the financial reporting framework to
be applied in the preparation of the financial statements is unacceptable
or if the agreement referred to above has not been obtained the auditor
should not accept the engagement.
 Agreement on audit engagement terms
o The auditor should agree upon the terms of the audit engagement with
management or those charged with governance, as appropriate.
o The terms of the audit engagement should be documented in an audit
engagement letter or other suitable form of written agreement and
should include the following:

The objective and scope of the audit of the financial statements.

The responsibilities of the auditor.

The responsibilities of management.

A statement that because of the inherent limitations of an audit,
together with the inherent limitations of internal control, an
unavoidable risk exists that some material misstatements may
not be detected, even though the audit is properly planned and
performed in accordance with GAAS.

Identification of the applicable financial reporting framework
for the preparation of the financial statements.
3

Reference to the expected form and content of any reports to be
issued by the auditor and a statement that circumstances may
arise in which a report may differ from its expected form and
content.
 Initial audits, including reaudit engagements –Covers steps the auditor should
take before accepting an engagement for an initial audit (or a reaudit
engagement) including requesting:
o Management to authorize the predecessor auditor to respond fully to
the auditor’s inquiries regarding matters that will assist the auditor in
determining whether to accept the engagement.

Should management refuses to authorize the predecessor
auditor to respond, or limits the response, the auditor should
inquire about the reasons and consider the implications of that
refusal in deciding whether to accept the engagement.

The auditor should evaluate the predecessor auditor’s response,
or consider the implications if the predecessor auditor provides
no response or a limited response, in determining whether to
accept the engagement.
 Recurring Audits – covers requirements in assessing whether circumstances
require the terms of the audit engagement to be revised.
o Acceptance of a change in the terms of the audit engagement –covers
the auditor’s consideration of changes to the terms of the audit
engagement when no reasonable justification for doing so exists.

If the terms of the audit engagement are changed by agreement,
the auditor and management should agree on and document the
new terms of the engagement in an engagement letter or other
suitable form of written agreement.
o If the auditor concludes that no reasonable justification for a change of
the terms of the audit engagement exists and is not permitted by
management to continue the original audit engagement, the auditor
should:

Withdraw from the audit engagement when possible under
applicable law or regulation .

Communicate the circumstances to those charged with
governance, and
4

Determine whether any obligation, either legal, contractual, or
otherwise, exists to report the circumstances to other parties,
such as owners, or regulators.
 Additional considerations in engagement acceptance
o Auditor’s report prescribed by law or regulation

If law or regulation prescribes a specific layout, form, or
wording of the auditor’s report that significantly differs from
the requirements of GAAS, the auditor should evaluate:
 Whether users might misunderstand the auditor’s report
and, if so,
 Whether the auditor would be permitted to reword the
prescribed form to be in accordance with the
requirements of GAAS or attach a separate report.

If the auditor determines that rewording the prescribed form or
attaching a separate report would not be permitted or would not
mitigate the risk of users misunderstanding the auditor’s report,
 The auditor should not accept the audit engagement unless
the auditor is required by law or regulation to do so.
 An audit performed in accordance with such law or
regulation does not comply with GAAS.
 The auditor should not include any reference to the audit
having been performed in accordance with GAAS within
the auditor’s report.
Practical Note
Because an engagement letter forms a contract between the reporting entity and the
auditor, and because both parties to the contract must understand its contents for it to be
valid, the letter should be delivered by the engagement leader or partner. In addition to
the contents of the letter other important planning considerations should be discussed and
documented when the letter is delivered. Following are some specific items that should
be discussed:
 Reach an understanding about the nature of the engagement, as well as client
and CPA firm responsibilities.
 Discuss management’s responsibilities for selecting the most appropriate
financial reporting framework, designing and maintaining internal control
systems and preparing financial statements and footnotes.
 Discuss current client issues, including any affects of economic climate.
5
 Request management to contact the predecessor auditor (if prior period
statements were audited) to obtain permission for review of the prior year audit
documentation or discuss the necessary additional audit procedures applicable
to opening balances.
 Make fraud inquiries.
 Arrange for proper workspace.
 Arrange for client assistance.
 Finalize dates for interim and year end fieldwork.
 Discuss target dates.
 Discuss range of audit fees and affects of variables (problems, no client
assistance, etc.).
 Document discussions in partner participation memo.
 Discuss financial statements and footnotes. If possible, prepare a rough draft or
block out financial statements and footnotes for discussion.
Illustrative Engagement Letter
To Dan West, President
Always Best Corporation:
You have requested that we audit the financial statements of Always Best Corporation
which include the balance sheet as of December 31, 2015, and the related statements of
income, changes in stockholders' equity, and cash flows for the year then ended, and the
related notes to the financial statements. We are pleased to confirm our acceptance and
our understanding of this audit engagement by means of this letter. Our audit will be
conducted with the objective of our expressing an opinion on the financial statements.
We will conduct our audit in accordance with auditing standards generally accepted in
the United States of America (GAAS). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. An audit
also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
Because of the inherent limitations of an audit, together with the inherent limitations of
internal control, an unavoidable risk that some material misstatements may not be
detected exists, even though the audit is properly planned and performed in accordance
with GAAS.
In making our risk assessments, we consider internal control relevant to the entity's
preparation and fair presentation of the financial statements in order to design audit
6
procedures that are appropriate in the circumstances but not for the purpose of expressing
an opinion on the effectiveness of the entity's internal control. However, we will
communicate to you in writing concerning any significant deficiencies or material
weaknesses in internal control relevant to the audit of the financial statements that we
have identified during the audit.
Our audit will be conducted on the basis that management acknowledges and understands
that they have responsibility
 For the preparation and fair presentation of the financial statements in
accordance with accounting principles generally accepted in the United States
of America;
 For the design, implementation, and maintenance of internal control relevant to
the preparation and fair presentation of financial statements that are free from
material misstatement, whether due to fraud or error; and
 to provide us with
o Access to all information of which management is aware that is
relevant to the preparation and fair presentation of the financial
statements such as records, documentation, and other matters;
o Additional information that we may request from management for the
purpose of the audit; and
o Unrestricted access to persons within the entity from whom we
determine it necessary to obtain audit evidence.
As part of our audit process, we will request from management written confirmation
concerning representations made to us in connection with the audit.
Other relevant information:
(Such as fee arrangements, billings, and other specific terms)
Reporting
We will issue a written report upon completion of our audit of Always Best Corporations
financial statements. Our report will be addressed to the Don West, President, Always
Best Corporation. We cannot provide assurance that an unmodified opinion will be
expressed. Circumstances may arise in which it is necessary for us to modify our opinion,
add an emphasis-of-matter or other-matter paragraph(s), or withdraw from the
engagement.
Please sign and return the attached copy of this letter to indicate your acknowledgment
of, and agreement with, the arrangements for our audit of the financial statements
including our respective responsibilities.
Largess, Ottiter $ Co., CPAs
Acknowledged and agreed on behalf of Always Best Corporation by:
7
Don West
Don West, President
November 15, 2015
THE AUDITOR’S COMMUNICATION WITH THOSE CHARGED WITH
GOVERANCE (AU-C Section 260)
Objectives of the auditor’s communications with those charged with governance are to:
Communicate clearly the responsibilities of the auditor in relation to the financial
statement audit and an overview of the planned scope and timing of the audit and to
obtain information relevant to the audit from those charged with governance.
Provide timely observations arising from the audit that are significant and relevant to
their responsibility to oversee the financial reporting process. Promote effective two-way
communication.
Definitions
Those charged with governance. The person(s) or organization(s) (for example, a
corporate trustee) with responsibility for overseeing the strategic direction of the entity
and the obligations related to the accountability of the entity. This includes overseeing the
financial reporting process. Those charged with governance may include management
personnel; for example, executive members of a governance board or an owner-manager.
Management. The person(s) with executive responsibility for the conduct of the entity’s
operations. For some entities, management includes some or all of those charged with
governance; for example, executive members of a governance board or an ownermanager.
Requirements
This SAS contains the following requirements:
 Determine who is charged with governance of the entity.
Communications with the audit committee or other subgroup of those charged with
governance may need to be supplemented by communications to the entire governing
body. When all of those charged with governance are involved in managing the entity the
communications do not need to be repeated to the same persons.
 Matters to be communicated should include:
o Planning phase:
 The auditor’s responsibilities in relation to the financial
statement audit.
 Planned scope and timing of the audit.
o Completion phase:
 Significant findings or issues from the audit.
 Uncorrected misstatements
8
When not all of those charged with governance are involved in management the auditor
should also communicate to the governing body:
 Material corrected misstatements that were brought to the attention of
management through the audit process.
 Significant findings or issues (including the Auditor’s views) that arose
through audit procedures and were discussed with or communicated to
management.
 Written representations that the auditor is requesting.
The Communication Process
 Establishing the Communication Process. The form, timing and expected
content of the auditor’s communication should be communicated.
 Forms of Communication. The auditor should communicate the significant
findings or issues from the audit, orally or in writing. The significant of the
matters, whether they have been resolved, legal or regulatory requirements and
other matters may affect whether the communication is oral or written. Matters
arising during the performance of the audit that were communicated to those
charged with governance and resolved need not be communicated again.
 Restricted Use. The communication is a by-product report and the auditor
should indicated its use is restricted to those charged with governance and
management and should not be used by anyone other than the specified parties
(AU-C Section 905).
 Timing of Communications. Communications should be timely; practically
they should occur before the audit report is released.
 Adequacy of the Communication Process. The auditor should evaluate if the
two-way communication has been adequate. If it has not been adequate, the
auditor should evaluate the effect on any auditing procedures performed and
take appropriate action.
Documentation. Documentation of the oral and written communications with
management and the governing body should be included in engagement files.
Practical Notes:
 Communication of the auditor’s responsibilities should include:
o A discussion of the reasonable assurance, not absolute, that is, provided by
an audit in accordance with GAAS.
o That internal control is considered in designing an audit strategy but that
no opinion of offered as to its effectiveness.
9
o That significant matters related to the audit, determined by the auditor’s
professional judgment, will be communicated to those charged with
governance.
 Matters related to the planned scope and timing of the audit to be communicated
may include:
o How the auditor plans to address significant risks of material
misstatement.
o The impact of risks of material misstatement on the consideration of
materiality levels.
o Other matters related to the structure and responsibilities of the board of
governance.
 Significant audit findings concerning accounting estimates and qualitative aspects
of significant accounting practices may be communicated.
 Significant difficulties encountered during the audit, such as delayed or
unavailable expected information, management restrictions and additional time
necessary to obtain appropriate audit evidence may be communicated.
Illustrative Communication Letter
March 20, 2016
To the Board of Directors of Always Best Corporation
We have completed our audit of Always Best Corporation for the year ended December
31, 2015; our audit report is dated March 15, 2016. Clarified Auditing Standards require
we provide you with the following information from our audit.
Our Responsibility in the Clarified Auditing Standards
Our engagement letter dated November 15, 2015 stated our responsibility is to express an
opinion about the fair presentation of your financial statements (a copy of which is
attached to this letter), for which you are responsible. Our audit does not relieve your
management of its responsibilities.
Planned Scope and Timing of the Audit
Our audit was performed according to the planned scope and timing communicated to
you in our planning discussion held via Skype on November 20, 2015. The agenda
provided you included the matters discussed in our two-way communication.
Significant Findings in Our Audit
Qualitative Aspects of Accounting Practices:
10
Management has responsibilities for the selection of its applicable financial reporting
framework and the appropriateness of accounting principles applied. The significant
accounting policies of Always Best Corporation described in Note A to the financial
statements were applied during the year without changes and no new policies were
adopted. Transactions during the year were entered according to authoritative guidance
and they have been recorded in the period of occurrence.
Management’s accounting estimates in the financial statements are based on their
knowledge and experience about past and current events, as well as assumptions about
future events. Certain estimates are especially sensitive because of their effects on
financial statements and the possibility of future variations from expectations. The most
sensitive estimate was the provision for settlement of a patent infringement lawsuit of
$500,000. We evaluated the factors and assumptions used by management in developing
the provision and determined the amount is reasonable.
Financial statement disclosures are complete, valid, consistent and understandable. The
most sensitive disclosure is Note G which pertains to the patent infringement lawsuit
mention above.
Difficulties Encountered in Performing the Audit
Completion of our audit was 14 days later than scheduled due to client personnel not
providing requested information at the expected time. Management was notified that the
information was not available at the expected time. As a result, our engagement team
spent 30 additional hours obtaining and scheduling the requested information and the
audit fee was increased $3,000.
Corrected and Uncorrected Misstatements
All known and likely misstatement discovered during the audit were communicated to
management on an Error Analysis Form. Management has corrected the misstatements
that were material, individually or in the aggregate.
Disagreements with Management
There were no disagreement with management regarding accounting, reporting or
auditing matters during the performance of our audit.
Management Representations
We requested a management representation letter dated March 15, 2016 to be signed by
Don West, President, and Wilbur Smith, Chairman of your Board of Directors. Matters
included have been discussed with Mr. West and Mr. Smith and determined to be valid
management representations relative to matters affecting our audit.
Management Consultation with Other Independent Accountants
We are not aware of any consultations made by management with other independent
accountants regarding any matter affecting our audit. We have not been contacted by any
other accountants as required by our professional standards when such consultations
occur.
11
Other Audit Findings or Issues
A variety of matters, such as the application of accounting principles and audit standards
have been discussed with management during the planning and performance phase of the
audit. Our retention as auditors was not affected by the matters discussed, which occurred
in the normal course of the audit.
The matters communicated in this letter are solely for the use of the Board of Directors
and management of Always Best Corporation.
Sincerely,
Largess, Ottiter $ Co., CPAs
EXTERNAL CONFIRMATIONS (AU-C Section 505)
Definitions
 Exception. A response that identifies a difference between information requested
to be confirmed or information from the entity's records and information provided
by the party from which a confirmation was requested .
 External confirmation. Audit evidence obtained as a direct written response to
the auditor from a third party either in paper form or by electronic or other
medium such as the auditor's direct access to information held by a third party.
 Negative confirmation request. A request that the confirming party respond
directly to the auditor only if there is disagreement with the information provided.
 Non-response. A failure of the confirming party to respond to a positive
confirmation request or an undeliverable confirmation.
 Positive confirmation request. A request that the confirming party respond by
providing the requested information or stating agreement or disagreement with the
information in the request.
General External Confirmation Procedures
The auditor must maintain control over the confirmation requests, specifically including
the following:
 Determining the information to be confirmed or requested;
 Selecting the correct confirming party;
 Designing the confirmation requests, including determining that requests are
properly directed to a valid, existing confirming party and provide for a return
directly to the auditor; and
 Sending the requests, including at least second requests when applicable, to the
confirming party.
Management’s Refusal of Auditor’s Confirmation Procedures
12
When management refuses to allow the auditor to send a confirmation request, the
auditor’s responsibilities include inquiries as to reasons for the refusal, evaluating
alternative procedures and impact on the risk assessment procedures. When and if the
auditor concludes that management’s refusal is unreasonable, or the auditor is unable to
obtain relevant and reliable audit evidence from alternative audit procedures, the auditor
should communicate the matter to those charged with governance. The auditor should
also evaluate the effects of the refusal on the audit report and any necessary modifications
(AU-C 705).
Negative Confirmations
Negative confirmations provide less reliable evidence than positive confirmations.
Negative confirmation requests should not be used as the sole substantive procedure
(other than risk assessment or analytical procedures) in response to an assessed risk of
material misstatement at the assertion (account classification) level, unless all of the
following are present:
 The auditor has assessed the risk of material misstatement as low and has
obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertion.
 The population of items subject to negative confirmation procedures comprises a
large number of small, homogeneous account balances, transactions, or
conditions.
 A very low exception rate is expected.
 The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests (such as in
the trucking industry with freight bills).
Additional Application Material in the Standard
It clarifies that the receipt of an oral response to a confirmation request does not meet the
definition of an external confirmation. It does permit, however, the use of an oral
response as part of alternative procedures performed in order to obtain sufficient
appropriate audit evidence.
The definition of confirmation has been changed to include direct access by the auditor to
information held by a third party.
The impact of these changes affect primarily the reliability of information summarized in
the confirmation statistics. An oral request will be presented as an alternative procedure
in these statistics; documentation of direct access to third party information will be
presented as a confirmation.
Practical Note:
Electronic confirmation processes must be secure and controlled. A secure confirmation
environment depends on the auditor’s and respondent’s processes or mechanisms that
minimize the possibility of compromise.
13
Practical Considerations for the Confirmation Process
Confirmations and Risk
Confirmations are obtained from third parties to obtain evidence about financial
statement assertions. As RMM (the combination of inherent and control risk) increases,
more and better evidence is needed to evaluate financial statement assertions. As an
example, possible effects of high and low risk on accounts receivable confirmation
procedures are outlined in the following table.
Level of Risk of Material Misstatement
High risk
Moderate risk
Low risk
Illustrative Procedures Based on Risk
Send positive confirmations covering all
ISIs above the calculated lower limit based
on risk and a number of units selected by
using a non-statistical sampling model or
an extensive non-sampling plan at the
engagement date.
Send positive confirmations covering all
ISIs above a higher calculated lower limit
based on risk and a small number of units
in the remaining population based on the
model approach or a non-sampling plan at
the engagement date or one month before.
Perform roll-forward procedures for the
period from the confirmation date to the
engagement date.
Send positive confirmations for all ISIs
above a calculated lower limit based on
risk (which should be higher than moderate
risk). A small number of units should also
be judgmentally selected from the sampling
population that are representative of the
transactions it includes for negative
confirmation or tracing to supporting sales
and collection documents. Confirmation
procedures may be performed 30 or 60
days before the engagement date. Perform
roll-forward procedures.
The Confirmation Process
Auditing standards stress the importance of control over the confirmation process for
both hardcopy and electronic confirmations. Control over the process from beginning to
end is the key to gathering sufficient, competent evidence to enable an auditor to evaluate
relevant financial statement assertions.
Following is a summary of the accounts receivable confirmation process:
14
1. Obtain an aged trial balance of accounts and reconcile it to the general ledger.
2. Decide on a selection method (random-number, systematic or haphazard), calculate
the desired sample size based on risk and materiality at the assertion level.
3. Select accounts for confirmation preparation and decide on positive or negative
requests.
4. Prepare confirmations (or supervise client preparation).
5. When the client prepares confirmations, make sure all those requested are completed
and that names, addresses and amounts agree to client records.
6. Independently verify a sample of customer addresses (phone book, Google, remittance
advices, etc.). Failing to perform this step can invalidate all evidence from the
confirmation process.
7. Make copies of confirmations to use as second requests.
8. Stuff envelopes, or supervise client stuffing.
9. Insert CPA firm return address envelopes into confirmation request envelopes.
10. Obtain postage and deliver to an off site mail drop.
11. Clear exceptions from replies by inquiries of client personnel and inspection of
supporting records.
12. Send second requests on non-replies by repeating steps 7 through 11.
13. Perform alternative procedures on non-replies to second requests by inspecting
supporting documents (records for sales, shipments and subsequent collections).
14. Consider proposing adjustments or recording errors on an Error Analysis Worksheet
and performing qualitative error analysis for confirmations of individually significant
items.
15. Project sample error rate to the sampling population for sampling applications.
16. Summarize confirmation statistics to support the relevant assertions.
Because of the substantial time required to prepare, control and send confirmations, an
auditor’s objective should be to select just enough confirmations to satisfy the audit
objectives. Here are a few of the ways this can be accomplished:




Pay attention to the risk assessment process. Whenever risk of material
misstatement at the assertion level is less than high, an auditor has opportunities
to reduce the number of confirmations. Considering the confirmation process
above and the number of confirmations sent, the average time spent by an auditor
is usually 20-30 minutes per confirmation. Even an assessed level of risk at
slightly less than high could raise the lower limit for individually significant
items, reduce the number of confirmations and save several hours of an auditor’s
time.
Base the lower limit for individually significant items at the assertion level on
tolerable misstatement (performance materiality) determined at the lowest risk
level possible (as risk goes down tolerable misstatement and the lower limit for
individually significant items goes up).
At lower risk levels, use the higher calculated amount of tolerable misstatement in
the model approach to sampling described in the Clarified Auditing Standards.
When risk is moderate to low, consider using negative confirmations for smaller
account balances.
15
Many auditors are learning that the time charges for the confirmation process can be
reduced significantly by sending electronic confirmations. Electronic confirmation
capability for accounts receivable is available through Capital Confirmation, Inc.
(www.confirmation.com). These electronic confirmations are secure, save substantial
preparation time, reduce turn around time and are economically priced.
WRITTEN REPRESENTATIONS (AU-C Section 580)
Written Representations as Audit Evidence
 Audit evidence–the information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based.
 Written representations–necessary information that the auditor requires in
connection with the audit of the entity’s financial statements. Similar to
responses to inquiries, written representations are audit evidence.
Written representations provide necessary audit evidence, complement other auditing
procedures and do not provide sufficient appropriate audit evidence on their own about
any of the matters with which they deal. They do not affect the nature or extent of other
audit procedures that the auditor applies to obtain audit evidence about the fulfillment of
management’s responsibilities or about specific assertions.
Objectives of the Auditor
 To obtain written representations from management (those charged with
governance when appropriate) that they believe that they have fulfilled their
responsibilities:
o For the preparation and fair presentation of the financial statements and
o For the completeness of the information provided to the auditor.
o To support other audit evidence relevant to the financial statements or
specific assertions in the financial statements by means of written
representations if determined necessary by the auditor or required by
other AU-C sections; and

To respond appropriately to written representations provided by
management (when appropriate, those charged with
governance) or

To respond appropriately if management (when appropriate,
those charged with governance) do not provide the written
representations requested by the auditor.
Definition
16
 Written representation –. A written statement by management provided to
the auditor to confirm certain matters or to support other audit evidence.
Written representations in this context do not include financial statements, the
assertions therein, or supporting books and records.
Requirements
Management from whom written representations are requested includes management
with appropriate responsibilities for the financial statements and knowledge of the
matters concerned.
Written representations are required about management’s responsibilities for:
 The preparation and fair presentation of the financial statements in accordance
with an appropriate financial framework.
 Information provided and completeness of transactions.
Other Written Representations – The auditor should request management to provide
written representations concerning:
 Fraud—its responsibility for the design, implementation and maintenance of
internal controls to prevent and detect fraud, any necessary disclosures from
internal risk assessment that financial statements may be materially misstated
as the result of fraud, and any known, suspected or alleged fraud.
 Laws and Regulations—identified or suspected non-compliance with laws and
regulations have been disclosed to the auditor.
 Uncorrected Misstatements—the effects of identified uncorrected
misstatements individually or in the aggregate are immaterial.
 Litigation and Claims—the effects of all known actual or possible litigation
and claims that should be considered in the preparation of financial statements
and disclosures for the applicable financial reporting framework.
 Estimates—the reasonableness of significant assumptions used in making
accounting estimates.
 Related Party Transactions—the disclosure of all related party relationships
and transactions of which it is aware.
 Subsequent Events—all subsequent events requiring adjustment or disclosure
required by the applicable reporting framework.
Additional Written Representations about the Financial Statements
17
Other AU-C sections require the auditor to request written representations. If, the auditor
determines that it is necessary to obtain one or more written representations to support
other audit evidence relevant to the financial statements or one or more specific
assertions in the financial statements, he or she should request such other written
representations.
Date of, and Period(s) Covered by, Written Representations
 Should be as of the date of the auditor’s report on the financial statements.
 Should be for all financial statements and period(s) referred to in the auditor’s
report.
Form of Written Representations – should be in the form of a representation letter
addressed to the auditor.
Doubt about the Reliability of Written Representations
If the auditor has concerns about the competence, integrity, ethical values, or diligence of
management or about management’s commitment to, or enforcement of, these, the
auditor should determine the effect that such concerns may have on the reliability of
representations (oral or written) and audit evidence in general.
If written representations are inconsistent with other audit evidence, the auditor should
perform audit procedures to attempt to resolve the matter.
 If the matter remains unresolved, the auditor should reconsider the assessment
of the competence, integrity, ethical values, or diligence of management or of
management’s commitment to, or enforcement of, these and should determine
the effect that this may have on the reliability of representations (oral or
written) and audit evidence in general.
 The auditor should take appropriate action, including determining the possible
effect on the opinion in the auditor’s report in accordance with the SAS
Modifications to the Opinion in the Independent Auditor’s Report, if the
auditor concludes that the written representations are not reliable.
Written Representations about Management’s Responsibilities
Disclaiming an opinion or withdrawing from the engagement. The auditor should
disclaim an opinion on the financial statements in accordance with the SAS Modifications
to the Opinion in the Independent Auditor’s Report or withdraw from the engagement if:
 The auditor concludes that sufficient doubt exists about the integrity of
management such that the written representations required are not reliable or
 Management does not provide the written representations required.
18
Requested Written Representations Not Provided – When management does not provide
one or more of the requested written representations, the auditor should:
 Discuss the matter with management;
 Re-evaluate the integrity of management and evaluate the effect that this may
have on the reliability of representations (oral or written) and audit evidence in
general; and
 Take appropriate actions, including determining the possible effect on the opinion
in the auditor’s report in accordance with the SAS Modifications to the Opinion in
the Independent Auditor’s Report, considering the requirement in paragraph 25 of
this SAS.
Illustrative Representation Letter
To Largess, Ottiter $ Co., CPAs
March 15, 2015
This representation letter is provided in connection with your audit of the financial
statements of Always Best Corporation, which includes the balance sheet as of
December 31, 2015, and the related statements of income, changes in stockholders'
equity, and cash flows for the year then ended, and the related notes to the financial
statements, for the purpose of expressing an opinion on the fair presentation of financial
statements in accordance with accounting principles generally accepted in the United
States (U.S. GAAP).
Certain representations in this letter are described as being limited to matters that are
material. Items are considered material, regardless of size, if they involve an omission or
misstatement of accounting information that, makes it probable that the judgment of a
reasonable person relying on the financial statements would be changed or influenced by
the omission or misstatement.
Except where otherwise stated below, immaterial matters less than $10,000 collectively
are not considered to be exceptions that require disclosure for the purpose of the
following representations. This amount is not necessarily the same threshold as for
adjustments to or disclosures in the financial statements.
We confirm that as of December 31, 2015:
Financial Statements:
 We have fulfilled our responsibilities in the engagement letter dated November
15, 2015, for the preparation and fair presentation of the financial statements in
accordance with U.S. GAAP.
 We acknowledge our responsibility for the design, implementation, and
maintenance of internal control relevant to the preparation and fair presentation of
financial statements free from material misstatement due to fraud or error.
19
 We acknowledge our responsibility for the design, implementation, and
maintenance of internal controls for fraud detection and prevention.
 Significant assumptions used by us in making accounting estimates are
reasonable, including fair value estimates.
 Related party relationships and transactions have been appropriately accounted
for and disclosed as required by U.S. GAAP.
 All events subsequent to the date of the financial statements for which U.S.
GAAP requires adjustment or disclosure have been adjusted or disclosed.
 The effects of uncorrected misstatements are immaterial, both individually and in
the aggregate, to the financial statements as a whole. A list of the uncorrected
misstatements is attached to this representation letter (an Error Analysis Form or
Audit Difference Evaluation Form).
 The effects of all known actual or possible litigation and claims have been
accounted for and disclosed in accordance with U.S. GAAP.
 Any other matters the auditor may consider appropriate (see illustrations in
Exhibit B in AU-C Section 580:
o Unaudited interim information accompanies the statements.
o The effect of a new accounting principle is not known.
o Uncertainties as to the going concern assumption exist.
o The value of certain long-lived tangible or intangible assets may be
impaired.
o The Corporation has a variable interest in another entity.
o The work of a specialist has been used by management.
o Other assets, liabilities or equity issues (detailed in Exhibit B of AU-C
Section 580)
Information Provided
 We have provided you with:
o Access to all information, of which we are aware that is relevant to the
preparation and fair presentation of the financial statements such as
records, documentation and other matters;
o Additional information that you have requested from us for the purpose of
the audit; and
o Unrestricted access to persons within the entity from whom you
determined it necessary to obtain audit evidence.
 All transactions have been recorded in the accounting records and are reflected in
the financial statements.
 We have disclosed to you the results of our assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
 We have no knowledge of any fraud or suspected fraud that affects the entity and
involves:
o Management;
o Employees who have significant roles in internal control; or
o Others when the fraud could have a material effect on the financial
statements
20
 We have no knowledge of any allegations of fraud, or suspected fraud, affecting
the entity's financial statements communicated by employees, former employees,
analysts, regulators or others.
 We have disclosed to you all known instances of non-compliance or suspected
non-compliance with laws and regulations whose effects should be considered
when preparing financial statements.
 We have disclosed to you all known actual or possible litigation, claims, and
assessments whose effects should be considered when preparing the financial
statements.
 We have disclosed to you the identity of the entity's related parties and all the
related party relationships and transactions of which we are aware.
 Other matters: (From Exhibit B of AU-C Section 580)
Don West, President
Don West
Wilber Smith, Chairman of the Board
Wilbur Smith
Illustrative Updating Representation Letter
May 1, 2016
To Largess, Ottiter $ Co., CPAs
In connection with your audit of the financial statements of Always Best Corporation as
of December 31, 2015 and for the period then ending for the purpose of expressing an
opinion as to whether the financial statements present fairly, in all material respects, the
financial position, results of operations, and cash flows of Always Best Corporation in
accordance with accounting principles generally accepted in the United States of
America, you were previously provided with a representation letter as of March 15, 2016.
No information has come to our attention that would cause us to believe that any of those
previous representations should be modified. To the best of our knowledge and belief, no
events have occurred subsequent to December 31, 2015 and through the date of this letter
that would require adjustment to or disclosure in the aforementioned financial statements.
Don West
Don West, President
Wilber Smith
Chairman of the Board and Chief Financial Officer
21
COMMUNICATING INTERNAL CONTROL MATTERS IDENTIFIED IN AN
AUDIT (AU-C Section 265)
Objective of the Auditor
The objective of the auditor is to appropriately communicate to those charged with
governance and management significant deficiencies in internal control that the auditor
has identified during the audit and that, in the auditor’s professional judgment, is of
sufficient importance to merit attention by governance and management persons.
Definitions
Deficiency in internal control—a deficiency in internal control exists when the design
or operation of a control does not allow management or employees, in the normal course
of performing their assigned functions, to prevent, or detect and correct, misstatements on
a timely basis.
A deficiency in design exists when a control necessary to meet the control objective is
missing or an existing control is not properly designed so that, even if the control
operates as designed, the control objective would not be met.
A deficiency in operation exists when a properly designed control does not operate as
designed or when the person performing the control does not possess the necessary
authority or competence to perform the control effectively.
Material weakness—a deficiency or a combination of deficiencies, in internal control,
such that there is a reasonable possibility that a material misstatement of the entity’s
financial statements will not be prevented, or detected and corrected, on a timely basis.
Significant deficiency--a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness yet important enough to merit attention by
those charged with governance.
Requirements
This SAS covers the following requirements which are discussed further below:
 Determination of Whether Deficiencies in Internal Control Have Been Identified
 Evaluating Identified Deficiencies in Internal Control
 Communication of Deficiencies in Internal Control
This SAS contains illustrative written communications:
 Exhibit A: Illustrative Written Communication (presented below)
 Exhibit B: Illustrative No Material Weakness Communication
 Exhibit C: Examples of Circumstances That May Be Deficiencies, Significant
Deficiencies, or Material Weaknesses
Practical Note:
22
Internal control is always relevant to the nature, size and complexity of a reporting entity.
Therefore, so should be the contents of the internal control communication letter.
Smaller entities will ordinarily have more informal control activities Performed by one or
a few individuals. For smaller entities, key controls performed at the entity level will
ordinarily have the most pervasive effects for preventing errors or fraud from occurring
and going undetected.
PRACTICAL ISSUES RELATING TO INTERNAL CONTROL
COMMUNICATIONS
Identifying and Reporting Control Deficiencies
Other important issues from AU-C 265, Communicating Internal Control Related
Matters Identified in an Audit, are:
 Evaluating control deficiencies: likelihood of occurrence and magnitude or
materiality.
 Deciding on the severity of deficiencies.
 Determining when control deficiencies become risks of material misstatements.
 Reporting deficiencies in subsequent years.
Evaluating Control Deficiencies
Consideration of the magnitude of a potential deficiency and whether there is a
reasonable possibility that controls will not prevent, detect or correct it is necessary to
determine its severity.
The magnitude of a deficiency is related to financial statement amounts or totals of
transactions considering both volume and activity.
A reasonable possibility of preventing, detecting or correcting a potential misstatement is
affected by risk factors that could cause a misstatement of an account balance. Those risk
factors include:
 Nature of accounts, transactions classes and relevant assertions involved—the risk
inherent in the information can be significant or not.
 Susceptibility of loss or fraud of related asset or liability—ease of
misappropriation or misstatement will affect risk.
 Ability to determine the amount involved—the subjectivity, complexity or
amount of judgment required may increase risk.
 Offsetting controls—they may or may not prevent, detect or correct
misstatements.
 Relationship to other deficiencies—the number of deficiencies could increase the
risk of misstatement.
 Future effects of the deficiency—probable changes in size of the entity, volume of
transactions, increases or decreases in personnel and other factors may increase or
decrease risk.
23
Deficiencies affecting the same account, transaction, disclosure, assertion or component
of internal controls should be considered together to determine significant deficiencies or
material weaknesses. Offsetting or compensating controls may limit the severity of a
deficiency, but tests of controls or more extensive systems walk-through procedures must
be performed to evaluate their operating effectiveness.
Following is a list of situations that may result in control deficiencies, significant
deficiencies, or material weaknesses:
 Inadequate or insufficient design of internal control over:
o Financial statement preparation.
o Significant transactions or account balances.
o The control environment.
o Segregation of duties among personnel.
o Information processing.
o Hiring qualified personnel.
 Properly designed controls that are not operated properly for:
o A significant transaction, process or account.
o Producing complete and accurate reports.
o Safeguarding assets.
o Reconciliation of subsidiary ledgers.
o Preventing management override of controls.
Some deficiencies that are commonly considered at least significant deficiencies and
must be separately identified in the letter:
 The absence of anti-fraud programs.
 No controls over non-routine transactions are operating.
 No controls over the use of accounting principles.
 No controls over general ledger accounting activities and the financial reporting
process.
Certain circumstances are always indicative of material weaknesses, which must be
separately identified in the letter:
 Any fraud by senior management, regardless of amount.
 Prior period restatements due to error or fraud.
 An auditor’s identification of a material misstatement that was not detected by
controls. These usually will result in proposed journal entries.
 Ineffective governance over financial reporting and internal control.
If the circumstance is determined not to be a material weakness, the auditor must
consider what “prudent officials” would conclude in the same circumstances. In a
seminar on fraud in Miami, participants were asked what standard they use to determine
if a fraud occurred. A participant responded his standard was the Miami Herald (local
newspaper) standard! In other words, what a newspaper reporter might define as fraud
could differ from audit standards. What a prudent official might define as a material
weakness could be different than an auditor’s definition!
24
Determining Reportable Control Deficiencies
According to AU-C Section 265, only significant deficiencies and material weaknesses
are required to be included in the internal control communication letter. Significant
deficiencies and material weaknesses arise from risks of material misstatements. For
small audits, risks of material misstatements are primarily the absence of key controls at
the entity level, either in design or in operation. For larger entities with more accounting
personnel, key controls will exist at both the entity and activity levels. An identified risk
of material misstatement will be reported to management in the internal control letter,
even though it may have been corrected.
To facilitate the risk assessment process, and the ultimate reporting of significant
deficiencies and material weaknesses, it is imperative key controls be identified and
evaluated during the planning and risk assessment phases of an audit. Based on internal
control documentation, identified risks will impact the development of cost-beneficial
audit strategies, the audit plan (program) and the internal control communication letter.
Reporting Deficiencies in Subsequent Years
For some smaller clients, changes in accounting policies and procedures are slow.
Employees that lack necessary qualifications to make accounting or internal control
decisions, no free time to design and administer internal controls improvements and lack
of understanding of the importance of internal controls, among other reasons, can hinder
reception of an auditor’s suggestions for improving internal controls.
In these situations, auditing standards require reporting significant weaknesses and
material weaknesses until management takes appropriate corrective action. If an auditor’s
attempts to help a client improve are not acknowledged or acted on, or if the
recommendations to correct deficiencies are not considered practical by management, the
suggestions must be communicated in the letter each year after the first.
Suggestions that may fall into this area are:
 Significant deficiencies
o Management’s expertise for selecting and applying accounting principles
is lacking
o No designed or operating anti-fraud programs
o No controls over unusual or extraordinary transactions
o No controls over monthly or annual closing in the financial reporting
process
 Material weaknesses
o Ineffective governance over controls and reporting
o Material misstatements requiring adjustment
o Identification of any management fraud
o Management’s failure to assess the effects of previous deficiencies and
take action or decide not to take action
o A large number of control deficiencies indicating a weak control
environment
25
Illustrative Internal Control Communication Letter
To: Don West, President
Always Best Corporation
In planning and performing our audit of the financial statements of Always Best
Corporation (the "Corporation") as of and for the year ended December 31, 2015, in
accordance with auditing standards generally accepted in the United States of America,
we considered the Corporation's internal control over financial reporting (internal
control) as a basis for designing audit procedures that are appropriate in the
circumstances for the purpose of expressing our opinion on the financial statements, but
not for the purpose of expressing an opinion on the effectiveness of the Corporation's
internal control. Accordingly, we do not express an opinion on the effectiveness of the
Corporation's internal control.
Our consideration of internal control was for the limited purpose described in the
preceding paragraph and was not designed to identify all deficiencies in internal control
that might be material weaknesses or material weaknesses or significant deficiencies and
therefore, material weaknesses or material weaknesses or significant deficiencies may
exist that were not identified. However, as discussed below, we identified certain
deficiencies in internal control that we consider to be material weaknesses or significant
deficiencies.
A deficiency in internal control exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned
functions, to prevent, or detect and correct, misstatements on a timely basis. A material
weakness is a deficiency, or a combination of deficiencies, in internal control, such that
there is a reasonable possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected, on a timely basis.
We consider the following deficiencies in the Corporation's internal control to be material
weaknesses (actual letter descriptions would be specific and describe potential effects):
o Ineffective governance over controls and reporting
o Material misstatements requiring adjustment
o Identification of any management fraud
o Management’s failure to assess the effects of previous deficiencies and
take action or decide not to take action
o A large number of control deficiencies indicating a weak control
environment
A significant deficiency is a deficiency, or a combination of deficiencies, in internal
control that is less severe than a material weakness, yet important enough to merit
attention by those charged with governance. We consider the following deficiencies in
the Company's internal control to be significant deficiencies (actual letter descriptions
would be specific and describe potential effects):
26
o Management’s expertise for selecting and applying accounting principles
is lacking
o No designed or operating anti-fraud programs
o No controls over unusual or extraordinary transactions
o No controls over monthly or annual closing in the financial reporting
process
(When only significant deficiencies are being communicated, a statement would be added
indicating none of the significant deficiencies are material weaknesses.)
This communication is intended solely for the information and use of management and
the board of directors of Always Best Corporation.
Largess Ottiter & Co., CPAs
Anywhere, USA
March 15, 2016 (the letter normally should be dated the date financial statements are
available for issue)
AUDIT EVIDENCE—LITIGATION, CLAIMS AND ASSESSMENTS (AU-C
Section 501)
The auditor is required to design and perform audit procedures to identify any litigation,
claims, and assessments involving the entity that could cause a risk of material
misstatement, including:
 Inquiring of management and others within the entity, including in-house legal
counsel;
 Obtaining from management a description and evaluation of litigation, claims,
and assessments that existed at the date of the financial statements and during the
period from the reporting date to the date the information is furnished, with an
identification of the matters referred to legal counsel;
 Reviewing minutes of meetings of boards of governance; documents obtained
from management concerning litigation, claims, and assessments; and
correspondence between the entity and its external legal counsel; and
 Analyzing legal expense accounts and invoices from external legal counsel.
For actual or potential litigation, claims, and assessments identified during the audit, the
auditor should obtain audit evidence relevant to the following:
 The period in which the underlying cause for legal action occurred
 The degree of probability of an unfavorable outcome
 The amount or range of any potential loss
Communication with the Entity’s Legal Counsel
Unless audit procedures indicate that no actual or potential litigation, claims, or
assessments causing a risk of material misstatement exist, the auditor should seek direct
communication with the entity's external legal counsel. The auditor should do so through
27
a letter of inquiry prepared by management and sent by the auditor requesting the entity's
external legal counsel to communicate directly with the auditor (request for a lawyer’s
letter).
In addition to the direct communications with the entity's external legal counsel, the
auditor should also seek direct communication with the entity's in-house legal counsel
when such in-house counsel exists. Audit evidence obtained from in-house legal counsel
is not, however, a substitute for direct communication with the entity's external legal
counsel.
The auditor should document the reasons for any decision not to seek direct
communication with the entity's legal counsel. Management’s refusal to permit the
auditor to communicate with legal counsel and/or the auditor’s inability to perform
appropriate audit procedures may cause the auditor to issue a qualified opinion or a
disclaimer of opinion.
The auditor should request management to authorize the entity's legal counsel to discuss
requested matters with the auditor. The auditor should request the entity's legal counsel to
inform the auditor in writing of any litigation, claims, assessments, and unasserted claims
that the counsel is aware of, together with an assessment of the outcome of the litigation,
claims, and assessments, and an estimate of the possible costs involved. Each lawyer’s
letter should include at least the following matters:
A. Identification of the entity, including subsidiaries, and the date of the
audit.
B. A list prepared by management (or a request by management that the legal
counsel prepare a list) that describes and evaluates pending or threatened
litigation, claims, and assessments for which the legal counsel has been
engaged and to which the legal counsel has devoted significant attention
on behalf of the company.
C. A list prepared by management that describes and evaluates unasserted
claims and assessments that management considers to be probable of
assertion and that, if asserted, would have at least a reasonable possibility
of an unfavorable outcome with respect to which the legal counsel has
been engaged and to which the legal counsel has devoted significant
attention on behalf of the entity.
For item B above, the letter should include a request that the legal counsel either provide
the following information or comment on those matters on which the legal counsel's
views may differ from those stated by management:
 A description of the nature of the matter, the progress of the case to date, and the
action that the entity intends to take (for example, to contest the matter vigorously
or to seek an out-of-court settlement).
 An evaluation of the likelihood of an unfavorable outcome and an estimate, if one
can be made, of the amount or range of potential loss.
28
 With respect to a list prepared by management (or by the legal counsel at
management's request), an identification of the omission of any pending or
threatened litigation, claims, and assessments or a statement that the list of such
matters is complete.
For item C above, the letter should include:
 A request that the legal counsel comment on those matters on which the legal
counsel's views concerning the description or evaluation of the matter may differ
from those stated by management.
 A statement that management understands that whenever, in the course of
performing legal services for the entity with respect to a matter recognized to
involve an unasserted possible claim or assessment that may call for financial
statement disclosure, the legal counsel has formed a professional conclusion that
the entity should disclose or consider disclosure concerning such possible claim
or assessment, the legal counsel, as a matter of professional responsibility to the
entity, will so advise the entity and will consult with the entity concerning the
question of such disclosure and the requirements of the applicable financial
reporting framework
When the entity has changed legal counsel or counsel has resigned, the auditor should
inquire of management about the reasons for any changes in legal counsel.
Practical Note
Auditing procedures regarding unasserted and asserted claims and assessments normally
begin with an analysis of professional services expense accounts. Coupled with inquiries
of management and persons charged with governance, reading minutes of board and/or
committee meetings and information obtained while performing other auditing
procedures, an auditor will obtain information as to the existences of legal counsel and
potential claims or assessments.
Should no information be discovered in carrying out the procedures above, and the client
represents there have been no services obtained from legal counsel during the year, the
requirements of AU-C Section 501 normally will be satisfied. When facts indicate the
services of legal counsel were used and management does not permit the auditor to
investigate the issues further, or when management refuses to send a letter of inquiry, the
auditor should consider modification of the audit report to either qualify or disclaim an
opinion depending on the pervasiveness and financial statement effects of the issues.
Illustrative Audit Inquiry Letter to Legal Counsel
To: Strong Arm Lawyers
Anywhere, USA
In connection with an audit of our financial statements at December 31, 2015 and for the
year then ended, management of the Corporation has prepared, and furnished to our
29
auditors, Largess, Ottiters $ Co., CPAs, Anywhere, USA,, a description and evaluation of
certain contingencies, including those set forth below involving matters with respect to
which you have been engaged and to which you have devoted substantial attention on
behalf of the Corporation in the form of legal consultation or representation. These
contingencies are regarded by management of the Company as material for this purpose.
Your response should include matters that existed at December 31, 2015 and during the
period from that date to the date of your response.
Pending or Threatened Litigation (Excluding Unasserted Claims)
This section ordinarily would include the following: (1) the nature of the litigation, (2)
the progress of the case to date, (3) how management is responding or intends to respond
to the litigation (for example, to contest the case vigorously or to seek an out-of-court
settlement), and (4) an evaluation of the likelihood of an unfavorable outcome and an
estimate, if one can be made, of the amount or range of potential loss.
This letter will serve as our consent for you to furnish to our auditor all the information
requested herein. Therefore, please furnish to our auditors such explanation, if any, that
you consider necessary to supplement the foregoing information, including an
explanation of those matters for which your views may differ from those stated and an
identification of the omission of any pending or threatened litigation, claims, and
assessments or a statement that the list of such matters is complete.
Unasserted Claims and Assessments (Considered by Management to be Probable of
Assertion and That, if Asserted, Would Have at Least a Reasonable Possibility of an
Unfavorable Outcome)
This section ordinarily would include the following: (1) the nature of the matter, (2) how
management intends to respond if the claim is asserted, and (3) an evaluation of the
likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount
or range of potential loss.
Please furnish to our auditors such explanation, if any, that you consider necessary to
supplement the foregoing information, including an explanation of those matters for
which your views may differ from those stated. We understand that whenever, in the
course of performing legal services for us with respect to a matter recognized to involve
an unasserted possible claim or assessment that may call for financial statement
disclosure, if you have formed a professional conclusion that we should disclose or
consider disclosure concerning such possible claim or assessment, as a matter of
professional responsibility to us, you will so advise us and will consult with us
concerning the question of such disclosure and the applicable requirements of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450,
Contingencies. Please specifically confirm to our auditors that our understanding is
correct.
The auditor may request the client to inquire about additional matters, for example,
unpaid or unbilled charges or specified information on certain contractually assumed
obligations of the Corporation, such as guarantees of indebtedness of others.
30
Please specifically identify the nature of and reasons for any limitations on your response.
Our auditors expect to have the audit completed about March 1, 2016. They would
appreciate receiving your reply by that date with a specified effective date no earlier than
February 15, 2016.
Wording that could be used in an audit inquiry letter, instead of the heading and first
paragraph, when the client believes that there are no unasserted claims or assessments to
be specified to the lawyer for comment that are probable of assertion and that, if
asserted, would have a reasonable possibility of an unfavorable outcome as specified by
Financial Accounting Standards Board Accounting Standards Codification 450,
Contingencies, is as follows:
Unasserted claims and assessments
We have represented to our auditors that there are no unasserted possible claims that
you have advised us are probable of assertion and must be disclosed, in accordance with
Financial Accounting Standards Board Accounting Standards Codification 450,
Contingencies. . (The second paragraph in the section relating to unasserted claims and
assessments would not be altered.)
Don West. President
Always Best Corporation
CONCLUSION
Audit correspondence provides significant substantive evidence supporting audit
conclusions. Compliance with the requirements in the Clarified Auditing Standards
relating to audit correspondence must be documented in engagement files. Ensuring that
all required correspondence is identified during planning, prepared in the proper form,
sent and obtained on a timely basis and considered with other substantive evidence
gathered by the auditor is necessary to achieve high-quality audit engagements.
31