Legal Definitions - audit letter

An audit letter is a formal, written request sent by independent financial auditors to a third party, such as a company's attorney, bank, or other financial institution. The primary purpose of this letter is to gather specific, objective information about the company or individual whose financial records are being examined. This information often includes details about financial accounts, outstanding debts, and any ongoing or potential legal disputes that could impact the entity's financial health. The recipient of the audit letter is expected to provide a direct response to the auditors, confirming or clarifying the requested details.

• Example 1: Verifying Legal Contingencies

  Imagine "Global Manufacturing Inc." is undergoing its annual financial audit. The independent auditing firm, "Reliable Audits LLC," sends an audit letter to "Corporate Counsel LLP," Global Manufacturing's external law firm. The letter specifically asks Corporate Counsel LLP to confirm details regarding any pending lawsuits against Global Manufacturing, any significant legal claims that have been threatened, and an estimate of potential financial liabilities arising from these legal matters.

  This example illustrates how auditors use an audit letter to obtain crucial information from a company's legal counsel about potential litigation. Such legal issues could significantly impact the company's financial statements and risk assessment, making the attorney's independent confirmation vital for the audit.

• Example 2: Confirming Financial Balances

  "Bright Future Academy," a private school, is being audited to ensure proper use of its endowment funds and tuition revenue. The auditors send an audit letter to "City Bank," where Bright Future Academy holds its main operating accounts and investment portfolios. The letter requests confirmation of the school's current cash balances, details of any outstanding loans or credit facilities, and information about any investment accounts managed by the bank on the school's behalf.

  This scenario demonstrates an audit letter being used to verify financial information directly with a banking institution. By confirming account balances and financial arrangements with an independent third party, the auditors can ensure the accuracy of the school's reported assets and liabilities.