Auditor enquiries into litigation and claims

Q: What does this look like on an audit?

Illustration only. A construction company's legal expenses account shows invoices from two firms of solicitors. The board minutes refer to a dispute with a subcontractor, which management says is "minor". One of the invoices mentions a second matter, an adjudication brought by a client, that nobody had raised. The auditor asks management and the directors about both disputes and reads the correspondence file. Because the adjudication could be material, the auditor asks the directors to prepare a specific letter to each firm listing the disputes, management's view of the likely outcome and the estimated cost. The auditor sends the letters and the solicitors reply directly. One reply says the adjudication is more likely than not to go against the company and gives a cost estimate well above management's. The auditor discusses the difference with the directors, who increase the provision. The representation letter confirms that all known claims have been disclosed.

Q: What should companies get right?

Keep a claims list. A current schedule of disputes, threatened claims and regulatory investigations makes the specific letter quick to prepare. Tell the lawyers in advance. Solicitors need the client's authority to respond and may charge for the reply. Do not describe disputes as trivial without evidence. The auditor will compare management's view with the lawyers' assessment. Update the auditor after the year end. A claim settled or threatened before the report is signed can still affect the accounts. Remember in house counsel. Inquiry extends to them as well as to external firms. Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

ISA (UK) 501 requires an auditor to design procedures to find litigation and claims that could cause a material misstatement, including asking management and those charged with governance, reading board minutes and correspondence with external lawyers, and reviewing legal expense accounts. Where a material claim is identified or suspected, the auditor must seek direct communication with the company’s external lawyers through a letter of inquiry prepared by the company and sent by the auditor.

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Why does the auditor look for legal claims at all?

ISA (UK) 501 paragraph 3(b) sets the auditor’s objective as obtaining sufficient appropriate audit evidence about the completeness of litigation and claims involving the entity. Paragraph A17 explains why: litigation and claims may have a material effect on the financial statements and may need to be disclosed or accounted for.

The emphasis on completeness is deliberate. A claim that has been recorded can be tested; the real risk for the auditor is a claim nobody has mentioned. Under FRS 102 a claim may need a provision, a contingent liability note or nothing, depending on the facts, as explained in legal claims: provision or contingent liability. The auditor cannot assess that judgement if it does not know the claim exists.

What procedures must every audit include?

Paragraph 9 requires the auditor to design and perform procedures to identify litigation and claims that may give rise to a risk of material misstatement, including:

inquiry of management and, where applicable, others within the entity, including in house legal counsel (the UK footnote adds that the auditor also makes appropriate inquiry of those charged with governance);
reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and
reviewing legal expense accounts.

Paragraph A20 says the auditor may examine source documents such as invoices for legal expenses. In practice, a solicitor’s invoice that mentions a dispute is one of the most reliable ways of finding claims that have not been reported. Paragraph A18 adds that information gathered in understanding the entity and its environment can also point to claims, for example a product recall in the industry or a known regulatory investigation.

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When does the auditor write to the company’s lawyers?

Paragraph 10 sets the trigger. If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or if its procedures indicate that other material litigation or claims may exist, it must seek direct communication with the entity’s external legal counsel. It does so through a letter of inquiry prepared by management and sent by the auditor, asking the lawyers to reply directly to the auditor. A UK footnote notes that the letter may need to be prepared by those charged with governance.

Paragraph A21 explains the value of this: direct communication helps the auditor establish whether potentially material claims are known and whether management’s estimates of the financial implications, including costs, are reasonable.

General or specific letters

The standard describes two kinds of letter:

Type	What it asks
Letter of general inquiry (paragraph A22)	Asks the lawyers to tell the auditor of any litigation and claims they know of, with an assessment of the outcome and an estimate of the financial implications, including costs.
Letter of specific inquiry (paragraph A23)	Lists the litigation and claims, gives management’s assessment of each outcome and its estimate of the financial implications, and asks the lawyers to confirm the reasonableness of those assessments and to say if the list is incomplete or incorrect.

A UK footnote to paragraph A23 records that the Council of the Law Society has advised solicitors that it is unable to recommend them to comply with non specific requests for information. In practice, UK auditors therefore use specific letters, which means the company must first produce an accurate list of claims and disputes.

Can the auditor meet the lawyers instead?

Paragraph A24 says the auditor may judge it necessary to meet the external lawyers to discuss the likely outcome, for example where the matter is a significant risk, is complex, or where management and the lawyers disagree. Such meetings ordinarily require management’s permission and are held with a representative of management present.

What if the company or its lawyers will not cooperate?

Paragraph 10 recognises that law, regulation or a professional body may prohibit the lawyers from communicating directly with the auditor; in that case the auditor must perform alternative procedures. Paragraph 11 then says that if management refuses permission to communicate or meet with the lawyers, or the lawyers refuse to respond appropriately or are prohibited from responding, and the auditor cannot obtain sufficient appropriate evidence by alternative procedures, the auditor must modify its opinion under ISA (UK) 705. The UK footnote notes that permission may be denied by those charged with governance. The forms a modified opinion can take are covered in audit opinions.

Company law sits behind this. Section 499 gives the auditor a right to require information and explanations from the company’s officers and employees, but section 499(4) says nothing in that section compels disclosure of information over which legal professional privilege could be claimed. That is why the letter of inquiry route depends on the company authorising its lawyers to respond, rather than on any statutory power over the lawyers themselves. Giving the auditor a misleading account of a dispute is a separate matter and can be an offence; see misleading the auditor.

How does this connect to written representations and the report date?

Paragraph 12 requires the auditor to request written representations from management and, where appropriate, those charged with governance, that all known actual or possible litigation and claims whose effects should be considered in preparing the financial statements have been disclosed to the auditor and accounted for and disclosed in accordance with the framework. That paragraph will appear in the management representation letter.

Paragraph A25 notes that the auditor’s report cannot be dated earlier than the date the auditor has sufficient appropriate evidence, so evidence about the status of claims is needed up to that date. It can usually be obtained by inquiry of management, but in some cases the auditor may need updated information from the external lawyers. ISA (UK) 560 paragraph A8 similarly lists extending earlier inquiries of legal counsel as a possible subsequent events procedure; see subsequent events and the auditor.

Paragraph A19 adds that evidence gathered to identify claims may also bear on valuation and measurement, and that ISA (UK) 540 applies to claims that require accounting estimates or related disclosures.

What does this look like on an audit?

Illustration only. A construction company’s legal expenses account shows invoices from two firms of solicitors. The board minutes refer to a dispute with a subcontractor, which management says is “minor”. One of the invoices mentions a second matter, an adjudication brought by a client, that nobody had raised.

The auditor asks management and the directors about both disputes and reads the correspondence file.
Because the adjudication could be material, the auditor asks the directors to prepare a specific letter to each firm listing the disputes, management’s view of the likely outcome and the estimated cost.
The auditor sends the letters and the solicitors reply directly. One reply says the adjudication is more likely than not to go against the company and gives a cost estimate well above management’s.
The auditor discusses the difference with the directors, who increase the provision. The representation letter confirms that all known claims have been disclosed.

What should companies get right?

Keep a claims list. A current schedule of disputes, threatened claims and regulatory investigations makes the specific letter quick to prepare.
Tell the lawyers in advance. Solicitors need the client’s authority to respond and may charge for the reply.
Do not describe disputes as trivial without evidence. The auditor will compare management’s view with the lawyers’ assessment.
Update the auditor after the year end. A claim settled or threatened before the report is signed can still affect the accounts.
Remember in house counsel. Inquiry extends to them as well as to external firms.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.