1. Litigation, Claims, and Assessments

For actual or potential litigation, claims, and assessments, the auditor should obtain audit evidence relevant to:

1. the period in which the underlying cause for legal action occurred;

2. the degree of probability of an unfavorable outcome; and

3. the amount or range of potential loss.

Potential litigation, claims, and assessments can be discovered by conducting the following audit procedures:

• Inquiring of management about unrecorded contingencies related to litigation.

• Reviewing IRS reports and tax returns for unsettled disagreements.

• Reviewing minutes of board and stockholder meetings.

• Obtaining a letter from the client's attorney.

It is management's responsibility to identify and account for contingent liabilities, including litigation, claims, and assessments, through the policies adopted by management for such purposes. The management representation letter should indicate that management has disclosed to the independent auditor all such relevant information.

Note that management is the primary source of information regarding contingencies, including litigation, claims, and  assessments. The letter sent to the client's attorney is simply a means of corroborating information provided by management.

2. An Entity's Ability to Continue as a Going Concern

On every audit engagement, the auditor is responsible for evaluating audit evidence to determine whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. "Reasonable period of time" depends on the financial reporting framework used:

• FASB: one year after the date the financial statements are issued (or available to be issued, as applicable)

• GASB: one year beyond the date of the financial statements. GASB further requires that, if a governmental entity currently knows information that may raise substantial doubt shortly thereafter (for example, within an additional three months), such information should also be considered.

If the going concern basis is not applicable to the financial reporting framework (e.g., cash basis, tax basis), the auditor should use one year after the date the financial statements are issued (or available to be issued).

• If there are conditions or events, considered in the aggregate, that rai se substantial doubt, the auditor should:

• Obtain sufficient appropriate audit evidence by performing additional audit procedures, including consideration of mitigating factors.

• Evaluate management's plans to alleviate substantial doubt. 

• Conclude on whether there is substantial doubt and the appropriateness of going concern basis of accounting (as opposed to the liquidation basis of accounting).

• Consider the impact to the auditor's report based on whether or not the substantial doubt has been alleviated by management's plans. The report may include a separate section or emphasis-of-matter paragraph (non issuer) or an explanatory paragraph (issuer) depending on the auditor's concusions.