24-28 (Objective 24-3) In analyzing legal expense for the Boastman Bottle Compan

Question

24-28 (Objective 24-3) In analyzing legal expense for the Boastman Bottle Company, Mary Little, CPA, observes that the company has paid legal fees to three different law firms during the current year. In accordance with her CPA firm’s normal operating practice, Little requests standard attorney letters as of the balance sheet date from each of the three law firms. On the last day of field work, Little notes that one of the attorney letters has not yet been received. The second letter contains a statement to the effect that the law firm deals exclusively in registering patents and refuses to comment on any lawsuits or other legal affairs of the client. The third attorney’s letter states that there is an outstanding unpaid bill due from the client and recognizes the existence of a potentially material lawsuit against the client but refuses to comment further to protect the legal rights of the client. Required a. Evaluate Little’s approach to sending the attorney letters and her follow-up on the responses. b. What should Little do about each of the letters?

Explanation / Answer

a) In this situation, Little need only send requests for letters to those attorneys who are involved with legal matters directly affecting the financial statements. The letters should be sent reasonably near to the completion of the field work, but the follow-up on nonresponses and unsatisfactory responses should not be deferred until the last day of field work. She should have examined the letters when they were returned and performed follow-up work at that time.Furthermore, the third letter should have addressed the lawsuit if the client informed the auditorof its existence.

b) The auditor would be required to follow up on the first attorney's letter by sending asecond request or calling the attorney to solicit a response. The second letter would not requireany additional follow-up due to the nature of the work performed by this attorney. Regarding thethird attorney's letter, it is necessary to have a conference with the attorney, client, and auditorto determine the nature and significance of the lawsuit.

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