In connection with an audit of our financial statements at December 31, 2014, an

Question

In connection with an audit of our financial statements at December 31, 2014, and for the year then end, management of the Company has prepared, and furnished to our auditors, Cole & Cole, CPAs, a description and evaluation of certain contingencies, including those set forth below, involving matters with respect to which you have been engage and to which you have devoted substantive attention on behalf of the company in the form of legal consultation or representation. Your response should include matters that existed at December 31, 2014. Because of the confidentiality of all these matter, your response may be limited.

In November 2014, an action was brought against the company by an outside salesman alleging breach of contract for sales commissions and asking an accounting with respect to claims for fees and commissions. The causes of action claim damages of $3, 000,000, but the company believe it has meritorious defenses to the claims. The possible exposure of the company to a successful judgement on behalf of the plaintiff is slight.

In July 2014, an action was brought against the company by industrial Manufacturing company (industrial) alleging patent infringement and seeking damages of $20,000,000.

On October 16, 2014, the U.S. District Court decided that the company had infringed on seven Industrial patents and awarded damages of 14,000,000. The company vigorously denies these allegations and has filed an appeal with the U.S. Court of Appeals. The appeal process is unexpected to take approximately two years, but there is some chance that consolidated may ultimately prevail.

Please furnish to our auditors such explanation, if any that you consider necessary to supplement this information, including an explanation, if any, that you consider necessary to supplement this information, including an explanation of those matters as to which you views may differ from those stated, and an identification of the omission of any pending or threatened litigation, claims and assessments or a statement that the list of such matters is complete. Your response may be quoted or referred to in the financial statements without further correspondence with you.

You also consulted on various other matters considered to be pending or threatened litigation. However, you may not comment on these matters because publicizing them may alert potential plaintiffs to the strengths of their cases. In addition, various other matters probable of assertion that have some chance of an unfavorable outcome, as of December 31, 2014, are presently considered unasserted claims and assessments.

Respectfully,
C.R. Brown
Chief Financial Officer

Read problem 11.56 Client Request for Attorney Letter on pages 491 and 492 of the textbook. Describe the omissions, ambiguities, and inappropriate statements and terminology in Brown’s letter. Remember that this is Brown’s letter requesting a response to auditors, but it must request responses in the manner most useful to auditors.

Reference

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services (6th ed.). New York, NY: McGraw-Hill.

Explanation / Answer

RELEVANT STATEMENT IN THE CLIENTS LETTER

AMBIGUITY / INAPPROPRIATE WORDING etc

PARA 1

PARA 2

PARA

3

PARA

4

PARA

5

RELEVANT STATEMENT IN THE CLIENTS LETTER

AMBIGUITY / INAPPROPRIATE WORDING etc

PARA 1

• In connection with an audit of our financial statements at December 31, 2014, and for the year then end

• Did the auditor handle more than one audit?
• In addition to 31/12/2014?

• management of the Company has prepared, and furnished to our auditors, Cole & Cole, CPAs

• are there two auditors?
• Cole & Cole and some other?

• of certain contingencies

• it has to be specific

• Each item has to be named

• involving matters with respect to which you have been engage

• incorrect grammar
• not necessarily only these items

• of legal consultation or representation

• auditors are involved in this

• existed at December 31, 2014

• not necessarily 31.12.2014 as some may go beyond

• your response may be limited

• this comment is irrelevant as auditor will judge limitations

PARA 2

• Outside salesman

• Was it an employee?

• Accounting?

• (not clear)

• meritorious defenses to the claims

• does it mean that it is false?

• The possible exposure of the company to a successful judgement on behalf of the plaintiff is slight.

• Is there proof that this is ‘slight’ as the amont claimed is $3M

PARA

3

• Patent infringement

• $20M is claimed, at what stage is it in as per proceeding in court?, has lawyer been contacted?, has a contingent liability been incorporated?

PARA

4

• Patent claim of Oct 16, 2014
• but there is some chance that “consolidated may ultimately prevail”

• $14M awarded to whom?
• (not clear)

PARA

5

• furnish to our auditors such explanation

• written to whom?

• including an explanation of those matters as to which you views may differ from those stated, and an identification of the omission of any pending or threatened litigation, claims and assessments or a statement that the list of such matters is complete

• how would auditors know an omission by client?

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