Legal Letters and Attorney Inquiries: How to Send Them and Evaluate the Replies

Litigation, claims and assessments are an area where management's knowledge is incomplete by design. Only counsel knows how strong a claim is and what is being negotiated. The legal inquiry puts that knowledge into the file in writing, directly from the source. This post covers the process from the claims list through to the conclusion on the accounting. The standard is summarized on AU-C 501.

Step 1: Build the claims list from several sources

Do not rely on management's list alone. Gather names of outside counsel and matters from:

• Inquiry of management and, for larger clients, in-house counsel.
• Board and committee minutes.
• Legal fee expense accounts: vendor ledger for law firms, with invoice descriptions.
• Prior-year legal letters and the prior-year working paper.
• Contracts, loan agreements and insurance claims correspondence.
• Regulator and tax authority notices.
• Bank confirmations and covenant reports, which sometimes mention disputes.

A law firm that appears in the vendor ledger for $18,000 in December and is absent from management's list is a lead. Ask about it before sending anything.

Step 2: Choose the recipients

Send to every outside counsel that handled a significant matter, and to in-house counsel where the entity has one. If management lists a matter but names no counsel, ask who is handling it. For small claims below a threshold the firm sets, a management listing with a memo may suffice. Record the threshold and the reasoning.

Step 3: Draft the request on client letterhead

The GAO Financial Audit Manual, applying AU-C 501, describes the request as prepared by management and sent by the auditor, asking counsel to communicate directly with the auditor. A reply that goes to management first is not direct evidence.

A usable request has these parts:

1. Authorization for counsel to respond to the auditor and the financial statement date.
2. A list of pending or threatened litigation, claims and assessments, with management's description and its evaluation of likely outcome and amount, for matters where counsel represents the entity.
3. A list of unasserted claims and assessments that management considers probable of assertion and reasonably possible of unfavorable outcome.
4. A request that counsel confirm whether the lists are complete, comment on any matter where counsel's view differs from management's, and identify any omitted matters.
5. A request to identify the nature of any limitations on the response.
6. The date through which the response is to be effective, and a request for an update close to the report date if the interval is long.

Step 4: Control the request

Treat the inquiry like a confirmation. The auditor sends the request through a method the firm can show was controlled, and receives the reply directly. Log each letter: counsel, date sent, follow-up, date received, whether the reply was complete. See external confirmations for the control principles that carry over.

Counsel replies within the limits of the ABA Statement of Policy regarding lawyers' responses to auditors' requests for information, the framework the profession calls the treaty with the AICPA. Three limits shape what comes back:

• On unasserted claims, a lawyer generally comments only on matters the client has specifically identified in the request. Silence about a matter management did not list is not confirmation that none exists, which is why Step 1 matters.
• Lawyers give opinions on outcome sparingly. Counsel's wording will often not map neatly to the ASC 450 categories of probable, reasonably possible and remote, so the accounting judgment stays with management and the auditor.
• A response speaks as of its date, which is why Step 7 exists.

Step 5: Read the reply for what it does and does not say

Replies come in three forms.

Look for the gaps. A letter that answers some matters and is silent on others is incomplete. A letter that refers to documents without describing the exposure does not help the accounting. A letter where counsel's evaluation is more pessimistic than management's is a misstatement lead.

Step 6: Handle refusals and silence

If counsel declines to respond about a significant matter, or restricts the response, and alternative procedures cannot supply sufficient evidence, the result is a scope limitation. The auditor first discusses it with management and then considers the effect on the opinion. If counsel does not reply at all, send a second request and phone the firm. If there is still no reply, perform alternative procedures: read the court docket where available, read correspondence in the file, discuss the matter with in-house counsel, and inspect settlement agreements. Where those procedures do not give enough evidence for a material matter, modify the opinion.

Step 7: Update near the report date

If a significant period passes between the legal letter's effective date and the report date, obtain an update or perform procedures to confirm nothing changed. Updating legal letters is a normal part of subsequent events work. See subsequent events procedures.

Step 8: Conclude on the accounting

Tie the reply to the accounting analysis. For each matter, the file shows probability of loss, whether an amount is estimable, the accrual or range and the disclosure. ASC 450 loss contingencies covers the accounting. The conclusion cross-references to the legal letter and to the representation letter.

Worked example

A contractor client has three matters: a payment dispute with a subcontractor ($95,000 claimed), a wage claim by a former employee, and an insurer coverage dispute. Management's list shows the first two. A review of legal fees shows a third firm engaged for the insurance matter.

• The senior sends letters to all three firms in January.
• Firms A and B reply by February 3. Firm A says outcome cannot be evaluated but a loss of up to the claimed amount is reasonably possible. Firm B says the wage claim is without merit and notes that the claimant has offered to settle for $12,000, which management has not accepted.
• Firm C does not reply. A second request goes February 10. It replies February 17 and confirms no matters other than those management described.
• The accounting conclusion for the subcontractor claim is no accrual, with disclosure of a reasonably possible loss of up to $95,000. For the wage claim it is no accrual while management rejects the offer and counsel sees no merit. If management decides to accept the $12,000 offer, a loss is probable and estimable, and the accrual is $12,000.
• The updated letter is obtained March 8, close to the report date.

Documentation checklist

• Claims list with the sources that produced it.
• Recipients and the reason for each.
• The signed requests and the response log.
• Replies, and a memo on any gaps.
• Accounting conclusion and disclosure.
• Update near report date.

CORAA prepares ready-to-review audit files for US CPA firms; the firm keeps the client, the review and the signature. See /us.

Sources

• AICPA, AU-C Section 501, Audit Evidence: Specific Considerations for Selected Items (litigation, claims and assessments)
• AICPA, AU-C Section 560, Subsequent Events and Subsequently Discovered Facts; AU-C Section 505, External Confirmations
• FMG Law, article on lawyer responses to auditor inquiry letters: fmglaw.com
• American Bar Association, Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information (1975); reproduced in the PCAOB's archived AU 337C
• U.S. Government Accountability Office, Financial Audit Manual, Volume 1 (GAO-26-108577), June 2026, section 550: gao.gov

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error