Legal representation letter
A legal representation letter is a letter addressed to the client’s legal representative(s) that has been drafted by the auditor and given to management to sign. The letter requests the legal representative(s) to respond to the questions in the letter and to reply directly to the auditor. The letter is mailed to the legal representative(s) by the auditor, rather than the client's staff. Auditors gather evidence using a legal representation letter in order to:
- identify outstanding legal matters,
- identify the probability of any material revenue or expense likely to arise from such matters and the estimated amount thereof, and
- ascertain the adequacy of the accounting treatment of such matters. (However, see Journal of Accountancy article Top 10 Audit Deficiencies.)
Note that although an auditor normally requires the evidence referred to above in order to form an opinion on the financial statements, it is open to the auditor to use methods other than a legal representation letter to obtain the information [fn]. The evidence obtained may be particularly relevant to both subsequent events and the appropriateness of the going concern assumption.
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