Tools View Chapter #11: Completing the Audit Question #1: Cole & Cole, CPAs, are
ID: 335965 • Letter: T
Question
Tools View Chapter #11: Completing the Audit Question #1: Cole & Cole, CPAs, are auditing the financial statements of Consoli- dated Industries Company for the year ended December 31, 2015. On April 2, 2016 an inquiry letter to J. J. Young, Consolidate d's outside attorney, was drafted to cor roborate the information furnished to Cole by management concerning pending and threatened litigation, claims, and assessments, as well as unasserted claims and as- sessments. On May 6, 2016, C. R. Cao, Consolidated's chief financial officer, gave Cole a draft of the inquiry letter below for Cole's review before mailing it to Young. May 6, 2016 J. J. Young, Attorney at Law 123 Main Street Anytown, USA Dear J. J. Young In connection with an audit of our financial statements at December 31, 201 5, and for the year then ended, management of the company has prepared, and furnished to our auditors, Cole & Cole, CPAs, 456 Broadway, Anytown, USA, a description and evaluation of certain contingencies, including those set forth below involving matters with respect to which you have been engaged and to which you have devoted sub- stantive attention on behalf of the company in the form of legal consultation or rep resentation. Your response should include matters that existed at December 31, 2015 Because of the confidentiality of all these matters, your response may be limited. In November 2015, an action was brought against the company by an outside sales- man alleging breach of contract for sales commissions and pleading a second cau of action for an accounting with respect to claims for fees and commissions. The salesman's action claims damages of $300.000, but the company believes it has mer itorious defenses to the claims. The possible exposure of the company to a successful judgment on behalf of the plaintiff is slight. In July 2015, an action was brought against the company by Industrial Manufacturing Company ("'Industrial") alleging patent infringement and sceking damages of $20 million. The action in U.S. District Court resulted in a decision on October 16, 201s holding that the company had infringed seven Industrial patents and awarding dam ages of $14 million. The company vigorously denies these allegations and has filed an appeal with the U.S. Court of Appeals for the Federal Circuit. The appeal process is expected to take approximately two years, but there is some chance that Industrial may ultimately prevail Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters to which your views may differ from those stated and an identification of the omis- sion of any pending or threatened litigation, claims, and assessments or a statement that the list of such matters is complete. Your response may be quoted or referred to in the financial statements without further correspondence with you. You also consulted on various other matters considered pending or threatened litiga- tion. However, you may not comment on these matters because publicizing them mayExplanation / Answer
Issues with Cao’s letter: