Form AP 105
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Audit Program for Contingencies and Litigation
Legal Company Name Client:
Balance Sheet Date:
Audit Program Reviewed by:
Date:
Instructions: The purpose of this audit program is to assist the auditor in
determining whether litigation, claims, assessments, commitments and contingencies
or uncertainties exist, that may require adjustment to, or disclosure in, the financial
statements, or that would affect the auditor’s report.
Comments should be documented in attached working papers, with appropriate
references noted in the right column below.
Performed
By
1. Inquire of management regarding its policies for identifying,
evaluating, and accounting for loss contingencies.
2. Inquire of management regarding:
a. The existence of pending or threatened litigation, and
asserted and unasserted claims against the company
b. Violations or possible violations of laws or regulations
c. Fraud involving management or employees
d. Communications from regulatory agencies concerning
noncompliance with, or deficiencies in, financial
reporting practices
e. Purchase commitments
f. Circumstances that require the use of accounting
estimates
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Performed
By
g. The existence of concentrations and economic
dependence
h. Significant product warranties
i. Anticipated losses on long-term contracts
3. Review current and previous years’ tax documentation for
indications of settlements of disputed amounts.
4. Review the minutes of representative governing board,
stockholders, and committee meetings for indications of
lawsuits or other contingencies for meetings held during and
subsequent to the period being audited.
5. Review legal correspondence file and examine legal
invoices for indications of contingent liabilities, particularly
lawsuits and pending tax assessments.
6. Examine contracts, loan agreements, leases, and
correspondence from government agencies to gain insight
regarding the entity’s current status and future prospects of
potential loss contingencies.
7. Obtain representation letters from the client’s major
attorneys regarding the status of pending litigation or other
contingent liabilities, and evaluate their responses. The
request for the attorneys’ letters should be signed by the
client and mailed and controlled by the auditor, with the
response going directly to the auditor.
(See Sample
Letter 3)
8. Gather information concerning guarantees, if any, from
bank confirmations obtained in the audit procedures for
cash.
9. Inquire of management about the existence of or potential
for environmental remediation liabilities, including the
following:
a. Whether the entity is aware of any hazardous wastes on
its site
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Performed
By
b. Whether the entity is required to have a permit to
transport, treat, store, or dispose of any hazardous
wastes
c. Whether the entity generates any hazardous wastes or
“regulated substances” in its business
d. Whether the entity ever used landfills, underground
storage tanks, or barrels to dispose of hazardous wastes
e. Whether the entity has been designated a potentially
responsible party
f. Whether the entity is involved in any civil or criminal
investigations involving environmental issues
g. Whether any regulatory authorities have issued any
reports on any property the entity is associated with. (If
yes, obtain copies of such reports and consider the
impact of the findings on the entity’s financial
statements.)
h. Whether the entity is aware of any requirements to clean
up sites of any property purchased, sold, closed, or
abandoned during the period under audit
i. Whether the entity has policies and procedures in place
to help identify environmental liabilities
10. Perform the following procedures to determine whether
significant estimates and assumptions and concentrations
have been properly identified:
a. Inquire of management if all circumstances that give rise
to accounting estimates have been identified by the
entity.
b. Identify those assertions implied in the financial
statements that may require an accounting estimate.
c. Review subsequent events and transactions occurring
between the balance-sheet date and the date of fieldwork
to test the reasonableness of accounting estimates as of
the balance-sheet date (see AP 100).
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Performed
By
d. Inquire of management about the existence of
concentrations, including:
(1) Concentrations in the volume of business transacted
with a particular customer, supplier, lender, grantor,
or contributor.
(2) Concentrations in revenue from particular products,
services, or fund-raising events.
(3) Concentrations in the available sources of supply of
materials, labor, or services.
(4) Concentrations in the market or geographic area.
(5) Concentrations of labor subject to collective
bargaining agreements.
(6) Concentrations of operations outside the entity’s
home country.
e. Summarize in the working papers information about
significant estimates and concentrations for disclosure in
the notes to the financial statements.
11. Confirm with outside parties the details of agreements
underlying unconditional purchase obligations.
12. Obtain representations from management, ordinarily in
writing, that the entity has disclosed all matters, including
unasserted claims and assessments that their lawyer has
advised them are probable of assertion (Management
Representation Letter). (See Sample Letter 2)
13. If the client has not consulted a lawyer during the period
under audit, include the following item in the Management
Representation Letter:
“We are not aware of any pending or threatened
litigation, claims, or assessments or unasserted claims or
assessments that are required to be accrued or disclosed
in the financial statements and we have not consulted a
lawyer concerning litigation, claims, or assessments.”
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Conclusions:
Comments: