Which statement from a lawyer's letter regarding litigation is most likely to require clarification by the auditor?

• A. I believe that the possible liability to the company is nominal in amount.
• B. I believe that the plaintiff's case against the company is without merit.
• C. I believe that the action can be settled for less than the damages claimed.
• D. I believe that the company will be able to defend this action successfully.

Answer: (C)

In auditing, when we rely on a lawyer’s letter about litigation, the key issue is whether the information provides a clear, measurable range of loss and the likelihood of those outcomes. A statement that the action can be settled for less than the damages claimed signals a potential monetary exposure, but it’s not a firm, documented figure or a stated probability. The auditor needs clarification on what amount is being referred to (is it an anticipated settlement, a best estimate, or a range?), and how likely that settlement is. This matters for accounting treatment—whether to accrue a liability, disclose the contingency, or note uncertainty in the financial statements. Other statements—such as assertions about merit or the likelihood of defense success—are legal opinions about outcome rather than a concrete settlement amount or range, and while they may raise questions, they don’t directly provide a figure that the auditor must confirm or quantify. So the statement about settling for less than claimed is the one that most clearly requires clarification to determine the correct measurement and disclosure.