Definition
A legal letter, formally an inquiry of a client's lawyer, is how the auditor obtains evidence about litigation, claims, and assessments under AU-C 501. Management sends or authorizes the letter, which lists known matters and asks counsel to confirm completeness and describe the likelihood and amount of loss. Lawyers respond within limits set by the professional policy they follow, so replies often contain careful, general wording.
Why it matters in an audit or review
Responses feed the ASC 450 evaluation of accruals and disclosures. A refusal to respond, or an evasive reply, can be a scope limitation. The auditor sends the letter early enough for replies and may update it near the report date. Counsel's silence on unasserted claims is normal and does not imply there are none.
Example
Illustrative: the letter lists a pending contract dispute. Counsel replies that a loss is reasonably possible but cannot estimate the amount. The auditor checks that the notes disclose the nature of the contingency and the fact that an estimate cannot be made.
Common mistakes
Sending the letter to in-house counsel only when outside firms handled the matters.
FAQ
What if the lawyer refuses to answer?
The auditor considers whether alternative procedures can provide the evidence. If not, the limitation can affect the opinion.
Sources
- AICPA, AU-C Section 501, Audit Evidence — Specific Considerations for Selected Items (litigation, claims and assessments)
- AICPA, AU-C Section 580, Written Representations
- FASB ASC 450-20, Loss Contingencies
- American Bar Association, Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (1975)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error