Joint Policy Statement Concerning Communications with Law Firms: In-depth review – Continued

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In this follow-up to an earlier article on the in-depth review of the “Joint Policy Statement Concerning Communications with Law Firms Regarding Claims and Possible Claims in Connection with the Preparation and Audit of Financial Statements,” which was originally drafted in 1978, we provide more information on the fundamental changes to the Statement that will apply to inquiry letters dated December 1, 2016 or later.

Here is a description of each of the fundamental changes:

  • Expanding the scope of the revised Statement

The revised Statement now applies to circumstances when communications regarding claims and possible claims involve the entity’s in-house legal counsel who is acting in a legal capacity by performing a role that commonly would be performed by external legal counsel.

  • Providing a more detailed discussion on fundamental concepts

The revised Statement now provides more detailed information on how to maintain confidentiality and privilege in relevant communications regarding the entity’s affairs involving the auditor and the law firm, so that the entity will not suffer any prejudice.

The revised Statement also discusses how exercising the right of privilege regarding information the auditor needs to perform his mandate could impact the quality and quantity of the audit evidence required by the auditor.

Lastly, since the various reporting frameworks may prescribe different requirements for the treatment of claims and possible claims, the revised Statement was structured to be accounting framework neutral so that it can apply to all situations, regardless of the framework used by management to prepare its financial statements.

  • Defining the auditor’s responsibilities more clearly

Although management is still responsible for adequately preparing the inquiry letter, the revised Statement directs the auditor to consider whether to request management to consult with the law firm before it drafts the letter, and to review the letter prior to sending it to the law firm. Therefore, the auditor must make sure the letter is adequately prepared, both in terms of form and content, so that the law firm’s response is useful for the audit.

  • Improving communication between management, the auditor and the law firm

The revised Statement focuses on communications between all the parties involved in the inquiry process regarding claims and possible claims, since the process may not always unfold as expected due to various circumstances. For instance, there may be disagreements concerning management’s evaluations, the request may lack clarity or be missing information, the response timeframe may be impossible to meet or the law firm’s response letter may be inappropriate. Such issues can only be resolved through proper communication between the parties involved.

  • Providing guidance on important dates and the timing of communications

The revised Statement mentions two important dates:

  1. Effective date of response – The date as of which the response letter from the law firm covers claims and possible claims involving the entity.
  2. Response date – The date by which the law firm is requested to provide its response letter.

The auditor must set the effective date of response and response date by taking into account that the law firm will normally require 5 business days after the effective date of response to prepare the response letter. If the response timeframe is less than 5 business days, management must promptly notify the law firm and determine a mutually agreeable response date given the circumstances.

The auditor can send the inquiry letter (prepared by management) to the law firm at least 3 weeks prior to the effective date of response.

However, whenever possible, the auditor can send the inquiry letter more than 3 weeks before the effective date of response so as to expedite the inquiry process.Improving the content of the inquiry letter.

The revised Statement aims to improve the inquiry process regarding claims and possible claims by providing examples for the following: inquiry letter, management’s evaluation of claims, standard and updated response letter, and request for an updated response letter.

Lise Rioux, CPA auditor, CA
Director – Professional Standards and Development
Mazars Harel Drouin, LLP.

For the Technical working group on assurance