AASB-CBA Joint Policy Statement communications with law firms

The AASB and CBA’s revised Joint Policy Statement will reflect developments in accounting and auditing standards, as well as the legal environment, over the past 35 years.

An auditor will often request that management prepare an inquiry letter to send to an entity’s law firm to confirm the fairness of management’s evaluation of the entity’s claims. The communication between the auditor, law firm and management is guided by The Joint Policy Statements Concerning Communications with Law Firms Regarding Claims and Possible Claims in Connection with the Preparation and Audit of Financial Statements (known as JPS).

JPS exposure draft

The Auditing and Assurance Standards Board (AASB) and the Canadian Bar Association (CBA) are looking to revise the existing JPS to reflect developments in the accounting and auditing standards, as well as the legal environment, over the 35 years since the JPS was first issued. The intent of the amended JPS is also to provide more clarity in certain areas and reflect good practice regarding the auditors’ and law firms’ communications responsibilities. An exposure draft proposing a revised JPS has been issued for public comment. The comment deadline is April 6.

Who’s affected?

Auditors, financial statement preparers and law firms are all affected by the proposal of a revised JPS. The exposure draft also offers an expanded definition of law firm to include in-house legal counsel who perform a role that commonly would be performed by external legal counsel.

Changes affecting auditors

The revised JPS will introduce greater flexibility in setting the effective date of response specified in the inquiry letter, depending on the auditor’s assessment of risk of material misstatement and considering other procedures the auditor may have performed. At the same time, the JPS sets out the timeline for the law firm to respond to the request, acknowledging that the firm has five business days from the effective date of response to prepare its reply.

The revised JPS will also include the responsibilities of the auditor, as well as those of management and the law firm.

Inquiry letter changes

The proposed inquiry letter is drafted in a way that does not require lawyers to understand the underlying accounting standards. It more clearly sets out the expected timing of response to the inquiry and allows for management to authorize the auditor to send out an updated request letter on its behalf.

Will there be an increase in work for auditors?

There may be. The proposed auditors’ responsibilities include a more explicit expectation that the auditor will review the inquiry letter drafted by management to make sure that the wording of the letter is in a form that is likely to result in a response from the lawyer providing the audit evidence required. There could be other implications, depending on current practice followed by the auditor. A careful reading of the exposure draft will help you understand how the proposals may affect your work.

Open for comment

If you’re an auditor, lawyer or preparer of financial statements, the AASB and CBA encourage you to submit your comments on the proposals in the exposure draft. Its full text can be found at frascanada.ca/assurance-and-related-services-standards under the tab “documents for comment.”