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

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 drafted in 1978, has been extensively revised. The new version will replace the existing Joint Policy Statement as well as Assurance and Related Services Guideline AuG-46, Communications with Law Firms under New Accounting and Auditing Standards.

The revised Joint Policy Statement applies to inquiry letters dated on or after December 1, 2016.

Why is the Statement being revised?

The revision of the existing Joint Policy Statement was necessary to reflect further developments in accounting and auditing standards, and the legal environment, and to provide enhanced guidance regarding the auditors’ and law firms’ communications responsibilities. In addition, the revised Joint Policy Statement was drafted to ensure consistency with CAS concepts and to set an example for professional practice.

What are the fundamental changes?

• Expand the Joint Policy Statement’s scope to apply to in-house legal counsel;
• Provide a more detailed introduction to fundamental concepts such as confidentiality, privilege (professional secrecy) and accounting framework neutrality;
• More clearly define the auditor’s responsibilities in ensuring the adequacy of the inquiry letter;
• Promote communication between management, the auditor and the law firm throughout the inquiry process;
• Provide guidance with respect to important dates and the timing of communications to ensure the inquiry process is useful and achievable within the desired timeframe;
• Improve the content of the inquiry letter by providing illustrative examples.

Is confirmation from lawyers always required?

Under CASs, the auditor is not specifically required to seek confirmation from lawyers. According to paragraph 10 of CAS 501, Audit Evidence – Specific Considerations for Selected Items, this procedure is only required if the auditor assesses a risk of material misstatement regarding identified litigation or claims, or when audit procedures indicate that other material litigation or claims may exist.

Paragraph 9 of CAS 501 indicates the other audit procedures the auditor can perform before deciding on the need to address an inquiry letter to the law firm. They comprise:

• Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;
• Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and
• Reviewing legal expense accounts.

Unwarranted use of the inquiry process can result in extra work for the auditor to ensure that all the requirements of the Joint Policy Statement are met. The auditor must therefore adequately assess the risks involved with litigation and claims and use his professional judgment before resorting to certain procedures.

The deadline for responding to the Joint Policy Statement exposure draft is April 6, 2015. We encourage you to keep abreast of developments in this area.
For more information on the important changes to the Joint Policy Statement Concerning Communications with Law Firms, watch for our second article on the issue to be published shortly.

 

 

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

For the Technical working group on assurance