Learning Objectives

Required:

1. 
   What should the verification procedures include? Who should perform the procedures?
   
2. 
   What type of documentation is required?
   
3. 
   What should be covered in the report on the quality review program?
   
4. 
   What organizational authority is required for the personnel who carry out the quality audit?
   
5. 
   What qualifications should the personnel have?
   

3. 
   Evaluation of Governance Evidence
   

20. 
    Inquiry of Client’s Attorney. Morgan LeFay, AS, of Horsens, Denmark, auditor Jan Ogier, Statsautoriseret Revisor, determines that LeFay has paid legal fees to four different law firms during the year under audit. Ogier requests standard attorney letters as of the balance sheet date from each of the four law firms.
    

Jan Ogier receives the following responses:

1. 
   One attorney furnished the following opinion: “It is our opinion that, based on a com- plete investigation of the facts known to us, no liability will be established against LeFay in the suits referred to in your letter of inquiry.”
   
2. 
   Attorney number two states that there may be a potentially material lawsuit against the client but refuses to comment further to protect the legal rights of the client.
   
3. 
   By the last day of field work, Ogier has not received any letter from the third attorney.
   
4. 
   The letter from the fourth attorney writes that their firm deals exclusively in registering song copyrights and cannot comment on LeFay lawsuits or any other legal affairs.
   

Required:

1. 
   Discuss the adequacy of the attorney’s response in each of the four cases. What procedures should Ogier take in response to each letter?
   
2. 
   What impact will each of these letters have on Ogier’s audit report? Explain.
   
3. 
   Should you refer to the attorney’s opinion in your audit report or disclosures?
   

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CHAPTER 11 COMPLETING THE AUDIT

20. 
    Representation Letter. Robert Dingle, president of Alcmena Manufacturing, Ltd., of Perth, Australia, and the company external auditor Deny H. Lawrence, Chartered Accountant (CA), reviewed matters that were supposed to be included in a written representation letter. Upon receipt of the following client representation letter, Lawrence contacted Dingle to state that it was incomplete. The letter Lawrence received is given below.
    

To D.H. Lawrence, CA
In connection with your audit of the balance sheet of Alcmena Manufacturing as of December 31, 20X2, and the related statements of income, retained earnings, and cash flows for the year then ended, 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 Alcmena Manufacturing in conformity with generally accepted accounting principles, we confirm, to the best of our knowledge and belief, the following representations made to you during your audit. There were no:

• 
  Plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
  
• 
  Communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices.
  
• 
  Agreements to repurchase assets previously sold.
  
• 
  Violations or possible violations of laws or regulations whose effects should be con- sidered for disclosure in the financial statements or as a basis for recording a loss contingency.
  
• 
  Unasserted claims or assessments that our lawyer has advised are probable of assertion and must be disclosed in accordance with International Accounting Standards No. 10.
  
• 
  Capital stock repurchase options or agreements or capital stock reserved for options, warrants, conversions, or other requirements.
  
• 
  Compensating balance or other arrangements involving restrictions on cash balances.
  

R. Dingle, President Alcmena Manufacturing Ltd. March 14, 20X3