What Is a Legal Representation Letter in Audit

Isaac Clarke is a partner at Linford & Co., LLP. He began his career at Ernst & Young in 2003, where he expanded his audit expertise over several years. Isaac specializes and has performed numerous SOC 1 and SOC 2 audits for a wide range of companies, from start-ups to fortune 100 companies. Isaac is pleased to help his clients understand and simplify their compliance activities. He pays attention to his clients` needs and works meticulously to ensure that every audit and report meets professional standards. Essentially, the letter is intended to confirm that the information provided by a client is accurate and complete. Upon receiving a response from a lawyer, a CPA can better determine whether a client`s legal situation has a material impact on the information reported in their financial statements. A formal written record of observations made by an organization`s management to auditors. The letter is prepared by the auditor and signed by management on a date as close as possible to the date of the auditor`s report and after all audit work has been completed, including the examination of events that occurred, for example, after the balance sheet date. The information in the letter is important to the financial statements, for which the auditor cannot obtain independent confirmatory evidence.

These issues may include future legal claims and adjustment events. The audit typically includes certain other procedures that are conducted for different purposes and may also disclose disputes, claims, and valuations. Examples of such procedures are: As you can imagine, a mandate is an important piece of evidence in any audit. The observations and management attestations contained in the letter provide some assurance that the information provided during the audit is used reliably in audit procedures and can support their opinion. Management attestation in letters of representation also blames management in the event that a control failure is overlooked during an audit or if inaccuracies occur because the information has not been provided or disclosed to the duty auditor. fn 3 An example of a separate letter is as follows: We are writing to inform you that (company name) has told us that (unless otherwise stated below and excluding the matters listed in the audit request letter) there are no potential undenied claims that you have disclosed are likely to be asserted and in accordance with Statement of Financial Accounting Standards No. 5 [AC Section C59] in its financial statements on (closing date) and for the (period) then ended. (List any possible claims that may not have been claimed.) Such a letter must be signed and sent by the examiner. An auditor generally has no legal skills and therefore cannot make a legal judgment on the information of which he or she is aware. Therefore, the auditor should ask the client`s management to send an investigation letter to the lawyers with whom management has consulted regarding litigation, claims and assessments. A lawyer may reasonably limit his or her response to questions to which he or she has given substantial attention in the form of legal advice or representation.

A lawyer`s answer may also be limited to questions which, individually or collectively, are considered important for the annual accounts, provided that the lawyer and the auditor have reached agreement on the limits of materiality for that purpose. Such restrictions are not limits to the scope of the audit. A lawyer`s letter is intended to examine all of the above information that would come from management. The letter is usually only necessary if the financial loss that would be decided between the auditor and the company would be significant. An audit certificate to the client`s lawyer is the main way for the auditor to obtain confirmation of the information provided by management on disputes, claims and assessments. fn 5 Evidence obtained from the client`s in-house general counsel or legal department may provide the auditor with the necessary confirmation. However, evidence obtained from an in-house lawyer does not replace information that an outside lawyer does not provide. As this is an official letter, a letter of representation can be created at any time during a SOC 1 or SOC 2 exam. However, paragraph .54 of Article 205 of the AT-C (SSAE 18) states that a letter of representation must be dated at the time of the auditor`s report. The letter may be signed at any time from the date of the report and the publication of the report. However, as this is important evidence for an audit opinion, the letter of representation must be signed prior to the publication of the report (AICPA SOC Guide 1 4.189).

The management of the federal reporting entity is responsible for ensuring that risks of loss, including those arising from litigation, claims and valuations, are presented in the financial statements in accordance with the requirements of Statement No. 5 of the Federal Financial Accounting Standards, Recognition of Federal Liabilities. This may require consultation with management and its legal department with the DOJ and other external legal counsel to ensure the accuracy and completeness of the presentation of litigation, claims and valuation issues in the federal reporting company`s financial statements. This consultation may include requesting a list of ongoing disputes, claims and assessments from the DOJ or other external legal counsel. Request for review letters should be sent to lawyers who may be in-house or external lawyers who have primary responsibility and knowledge of certain disputes, claims and assessments. If the in-house counsel only deals with disputes, claims, and evaluations, their assessment and response will generally be considered appropriate. If in-house and external lawyers have been involved in the cases, but the in-house lawyer has assumed primary responsibility for the cases, the in-house lawyer`s assessment may very well be considered appropriate. However, there may be circumstances in which disputes, claims and judgments involving significant overall participation of external counsel are of such importance to the financial statements that the auditor should consider seeking the response of external counsel that they have not made a substantive finding that differs in one material respect from the in-house counsel`s assessment, although the in-house legal counsel may assume primary responsibility. A letter of representation (also known as a letter of representation, Rep.

Letter, LOR) in Audit Services is an official letter from the American Institute of Certified Public Accountants, which is typically prepared by external auditors on behalf of a company`s management and signed by a member of the board of directors. By signing the letter of representation, the executive confirms to the external auditor that all information submitted is accurate and that all material information has been disclosed to the auditors. For a financial audit, these would be the annual accounts and the internal controls of the financial reports. In the context of a SOC 1 or SOC 2 audit, management representation letters not only confirm that all material information has been shared with the service auditors, but also assume responsibility for the presentation and accuracy of the claim and description in the report, and to confirm that controls were effectively designed and conducted during the evaluation period. The management of the Federal Declaration Unit and its Legal Department is responsible for providing a letter of legal representation to the auditor. The letter of legal representation must cover all disputes, claims and assessments relating to the Federal Information Office, including matters handled by the DOJ or other external legal counsel on behalf of the Federal Reporting Unit. F. A statement that the undersigned person and the company have provided the service auditor with all relevant information and access.

This article discusses what, when, why and who is related to letters of representation for audits, especially SOC audits. In special circumstances, the auditor may receive an answer at a conference on issues that are the subject of the audit research letter, which provides an opportunity for more detailed discussion and explanation than a written response. A conference call may be appropriate if the assessment of the need to account for or disclose disputes, claims and valuations includes issues such as assessing the impact of legal advice in relation to unresolved legal issues, the impact of unconfirmed information or other complex judgments. .