CPA · Question 27 · Area III: Performing Procedures
An auditor is reviewing the legal letter received from the client's external counsel. The letter states that the outcome of a significant lawsuit against the client is 'probable' and the potential loss is 'reasonably estimable' at $1,000,000. The client has disclosed the lawsuit in the notes but has NOT accrued a liability. What is the appropriate audit response?
Answer options:
Accept the disclosure as sufficient since the exact amount is only an estimate.
Request management to accrue the liability; if they refuse, consider modifying the opinion.
Issue a disclaimer of opinion due to the uncertainty of litigation.
Add an emphasis-of-matter paragraph to the unmodified opinion.
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