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Assurance Canadian Auditing Standards CAS 501 Audit Evidence Specific Considerations for Selected Items CANADIAN AUDITING STANDARDS CAS 501 audit evidence specific considerations for selected items

(Effective for audits of financial statements for periods ending on or after December 14, 2010) CAS 501 contains wording that is amended from that in corresponding ISA 501. The Preface to the CICA Handbook Assurance provides an explanation of these amendments. CONTENTS Introduction Scope of this CAS Effective Date Objective Requirements Inventory Litigation and Claims Segment Information Application and Other Explanatory Material Inventory Litigation and Claims Segment Information Appendix: Joint Policy Statement Concerning Communications with Law Firms Regarding Claims and Possible Claims in Connection with the Preparation and Audit of Financial Statements Canadian Auditing Standard (CAS) 501, Audit Evidence Specific Considerations for Selected Items, should be read in conjunction with CAS 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Canadian Auditing Standards. A1-A16 A17-CA25a A26-A27 4-8 9-12 13 1 2 3 Paragraph

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Introduction Scope of this CAS 1. This Canadian Auditing Standard (CAS) deals with specific considerations by the auditor in obtaining sufficient appropriate audit evidence in accordance with CAS 330, 1 CAS 500 2 and other relevant CASs, with respect to certain aspects of inventory, litigation and claims involving the entity, and segment information in an audit of financial statements. Effective Date 2. This CAS is effective for audits of financial statements for periods ending on or after December 14, 2010. Objective 3. The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the: (a) (b) Existence and condition of inventory; Completeness of litigation and claims involving the entity; and

(c) Presentation and disclosure of segment information in accordance with the applicable financial reporting framework. Requirements Inventory 4. If inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by: (a) Attendance at physical inventory counting, unless impracticable, to: (Ref: Para. A1-A3)

(i) Evaluate management's instructions and procedures for recording and controlling the results of the entity's physical inventory counting; (Ref: Para. A4) (ii) Observe the performance of management's count procedures; (Ref: Para. A5)

(iii) Inspect the inventory; and (Ref: Para. A6) (iv) Perform test counts; and (Ref: Para. A7-A8)

(b) Performing audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results.

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5. If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the procedures required by paragraph 4, perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. (Ref: Para. A9-A11) 6. If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions. 7. If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor's report in accordance with CAS 705. 3 (Ref: Para. A12-A14) 8. If inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following: (a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. (Ref: Para. A15) (b) Perform inspection or other audit procedures appropriate in the circumstances. (Ref: Para. A16) Litigation and Claims 9. The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: (Ref: Para. A17-A19) (a) Inquiry of management and, where applicable, others within the entity, including inhouse legal counsel; (b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and (c) Reviewing legal expense accounts. (Ref: Para. A20)

10. If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in addition to the procedures required by other CASs, seek direct communication with the entity's external legal counsel. The auditor shall do so through a letter of inquiry, prepared by management and sent by the auditor, requesting the entity's external legal counsel to communicate directly with the auditor. If law, regulation or the respective legal professional body prohibits the entity's external legal counsel from communicating directly with the auditor, the auditor shall perform alternative audit procedures. (Ref: Para. A21-CA25a)

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11.

If:

(a) management refuses to give the auditor permission to communicate or meet with the entity's external legal counsel, or the entity's external legal counsel refuses to respond appropriately to the letter of inquiry, or is prohibited from responding; and (b) the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, the auditor shall modify the opinion in the auditor's report in accordance with CAS 705. Written Representations 12. The auditor shall request management and, where appropriate, those charged with governance to provide written representations that all known actual or possible litigation and claims whose effects should be considered when preparing the financial statements have been disclosed to the auditor and accounted for and disclosed in accordance with the applicable financial reporting framework. Segment Information 13. The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by: (Ref: Para. A26) (a) Obtaining an understanding of the methods used by management in determining segment information, and: (Ref: Para. A27) (i) Evaluating whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework; and (ii) Where appropriate, testing the application of such methods; and

(b) Performing analytical procedures or other audit procedures appropriate in the circumstances. *** Application and Other Explanatory Material Inventory Attendance at Physical Inventory Counting (Ref: Para. 4(a)) A1. Management ordinarily establishes procedures under which inventory is physically counted at least once a year to serve as a basis for the preparation of the financial statements and, if applicable, to ascertain the reliability of the entity's perpetual inventory system.

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A2.

Attendance at physical inventory counting involves:

Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts; Observing compliance with management's instructions and the performance of procedures for recording and controlling the results of the physical inventory count; and Obtaining audit evidence as to the reliability of management's count procedures.

These procedures may serve as test of controls or substantive procedures depending on the auditor's risk assessment, planned approach and the specific procedures carried out. A3. Matters relevant in planning attendance at physical inventory counting (or in designing and performing audit procedures pursuant to paragraphs 4-8 of this CAS) include, for example: The risks of material misstatement related to inventory. The nature of the internal control related to inventory.

Whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting. The timing of physical inventory counting. Whether the entity maintains a perpetual inventory system.

The locations at which inventory is held, including the materiality of the inventory and the risks of material misstatement at different locations, in deciding at which locations attendance is appropriate. CAS 600 4 deals with the involvement of other auditors and accordingly may be relevant if such involvement is with regard to attendance of physical inventory counting at a remote location. Whether the assistance of an auditor's expert is needed. CAS 620 5 deals with the use of an auditor's expert to assist the auditor to obtain sufficient appropriate audit evidence. Evaluate Management's Instructions and Procedures (Ref: Para. 4(a)(i)) A4. Matters relevant in evaluating management's instructions and procedures for recording and controlling the physical inventory counting include whether they address, for example: The application of appropriate control activities, for example, collection of used physical inventory count records, accounting for unused physical inventory count records, and count and re-count procedures. The accurate identification of the stage of completion of work in progress, of slow moving,

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obsolete or damaged items and of inventory owned by a third party, for example, on consignment. The procedures used to estimate physical quantities, where applicable, such as may be needed in estimating the physical quantity of a coal pile. Control over the movement of inventory between areas and the shipping and receipt of inventory before and after the cutoff date. Observe the Performance of Management's Count Procedures (Ref: Para. 4(a)(ii)) A5. Observing the performance of management's count procedures, for example, those relating to control over the movement of inventory before, during and after the count, assists the auditor in obtaining audit evidence that management's instructions and count procedures are adequately designed and implemented. In addition, the auditor may obtain copies of cutoff information, such as details of the movement of inventory, to assist the auditor in performing audit procedures over the accounting for such movements at a later date. Inspect the Inventory (Ref: Para. 4(a)(iii)) A6. Inspecting inventory when attending physical inventory counting assists the auditor in ascertaining the existence of the inventory (though not necessarily its ownership), and in identifying, for example, obsolete, damaged or aging inventory. Perform Test Counts (Ref: Para. 4(a)(iv)) A7. Performing test counts, for example, by tracing items selected from management's count records to the physical inventory and tracing items selected from the physical inventory to management's count records, provides audit evidence about the completeness and the accuracy of those records. A8. In addition to recording the auditor's test counts, obtaining copies of management's completed physical inventory count records assists the auditor in performing subsequent audit procedures to determine whether the entity's final inventory records accurately reflect actual inventory count results. Physical Inventory Counting Conducted Other than At the Date of the Financial Statements (Ref: Para. 5) A9. For practical reasons, the physical inventory counting may be conducted at a date, or dates, other than the date of the financial statements. This may be done irrespective of whether management determines inventory quantities by an annual physical inventory counting or maintains a perpetual inventory system. In either case, the effectiveness of the design, implementation and maintenance of controls over changes in inventory determines whether the conduct of physical inventory counting at a date, or dates, other than the date of the financial statements is appropriate for audit purposes. CAS 330 establishes requirements and provides guidance on substantive procedures performed at an interim date. 6

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A10. Where a perpetual inventory system is maintained, management may perform physical counts or other tests to ascertain the reliability of inventory quantity information included in the entity's perpetual inventory records. In some cases, management or the auditor may identify differences between the perpetual inventory records and actual physical inventory quantities on hand; this may indicate that the controls over changes in inventory are not operating effectively. A11. Relevant matters for consideration when designing audit procedures to obtain audit evidence about whether changes in inventory amounts between the count date, or dates, and the final inventory records are properly recorded include: Whether the perpetual inventory records are properly adjusted. Reliability of the entity's perpetual inventory records.

Reasons for significant differences between the information obtained during the physical count and the perpetual inventory records. Attendance at Physical Inventory Counting Is Impracticable (Ref: Para. 7) A12. In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor. The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as explained in CAS 200, 7 the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. A13. In some cases where attendance is impracticable, alternative audit procedures, for example, inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of inventory. A14. In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures. In such cases, CAS 705 requires the auditor to modify the opinion in the auditor's report as a result of the scope limitation. 8 Inventory under the Custody and Control of a Third Party Confirmation (Ref: Para. 8(a)) A15. CAS 505 9 establishes requirements and provides guidance for performing external confirmation procedures. Other Audit Procedures (Ref: Para. 8(b))

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A16. Depending on the circumstances, for example, where information is obtained that raises doubt about the integrity and objectivity of the third party, the auditor may consider it appropriate to perform other audit procedures instead of, or in addition to, confirmation with the third party. Examples of other audit procedures include: Attending, or arranging for another auditor to attend, the third party's physical counting of inventory, if practicable. Obtaining another auditor's report, or a service auditor's report, on the adequacy of the third party's internal control for ensuring that inventory is properly counted and adequately safeguarded. Inspecting documentation regarding inventory held by third parties, for example, warehouse receipts. Requesting confirmation from other parties when inventory has been pledged as collateral. Litigation and Claims Completeness of Litigations and Claims (Ref: Para. 9) A17. Litigation and claims involving the entity may have a material effect on the financial statements and thus may be required to be disclosed or accounted for in the financial statements. A18. In addition to the procedures identified in paragraph 9, other relevant procedures include, for example, using information obtained through risk assessment procedures carried out as part of obtaining an understanding of the entity and its environment to assist the auditor to become aware of litigation and claims involving the entity. A19. Audit evidence obtained for purposes of identifying litigation and claims that may give rise to a risk of material misstatement also may provide audit evidence regarding other relevant considerations, such as valuation or measurement, regarding litigation and claims. CAS 540 10 establishes requirements and provides guidance relevant to the auditor's consideration of litigation and claims requiring accounting estimates or related disclosures in the financial statements. Reviewing Legal Expense Accounts (Ref: Para. 9(c)) A20. Depending on the circumstances, the auditor may judge it appropriate to examine related source documents, such as invoices for legal expenses, as part of the auditor's review of legal expense accounts. Communication with the Entity's External Legal Counsel (Ref: Para. 10-11) A21. Direct communication with the entity's external legal counsel assists the auditor in

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obtaining sufficient appropriate audit evidence as to whether potentially material litigation and claims are known and management's estimates of the financial implications, including costs, are reasonable. A22. In some cases, the auditor may seek direct communication with the entity's external legal counsel through a letter of general inquiry. For this purpose, a letter of general inquiry requests the entity's external legal counsel to inform the auditor of any litigation and claims that the counsel is aware of, together with an assessment of the outcome of the litigation and claims, and an estimate of the financial implications, including costs involved. A23. If it is considered unlikely that the entity's external legal counsel will respond appropriately to a letter of general inquiry, for example, if the professional body to which the external legal counsel belongs prohibits response to such a letter, the auditor may seek direct communication through a letter of specific inquiry. For this purpose, a letter of specific inquiry includes: (a) A list of litigation and claims;

(b) Where available, management's assessment of the outcome of each of the identified litigation and claims and its estimate of the financial implications, including costs involved; and (c) A request that the entity's external legal counsel confirm the reasonableness of management's assessments and provide the auditor with further information if the list is considered by the entity's external legal counsel to be incomplete or incorrect. A24. In certain circumstances, the auditor also may judge it necessary to meet with the entity's external legal counsel to discuss the likely outcome of the litigation or claims. This may be the case, for example, where: The auditor determines that the matter is a significant risk. The matter is complex. There is disagreement between management and the entity's external legal counsel.

Ordinarily, such meetings require management's permission and are held with a representative of management in attendance. A25. In accordance with CAS 700, 11 the auditor is required to date the auditor's report no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor's opinion on the financial statements. Audit evidence about the status of litigation and claims up to the date of the auditor's report may be obtained by inquiry of management, including in-house legal counsel, responsible for dealing with the relevant matters. In some instances, the auditor may need to obtain updated information from the entity's external legal counsel.
CA25a.

In Canada, for communications between auditors and the entity's external legal

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counsel, the method of communication with the entity's external legal counsel in connection with claims and possible claims as part of the auditor's examination of financial statements, is guided by the "Joint Policy Statement Concerning Communications with Law Firms Regarding Claims and Possible Claims in Connection with the Preparation and Audit of Financial Statements." This Joint Policy Statement is appended to this CAS. [This is a Canadian-only paragraph. There is no equivalent paragraph in corresponding ISA 501.] Segment Information (Ref: Para. 13) A26. Depending on the applicable financial reporting framework, the entity may be required or permitted to disclose segment information in the financial statements. The auditor's responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements taken as a whole. Accordingly, the auditor is not required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a stand alone basis. Understanding of the Methods Used by Management (Ref: Para. 13(a)) A27. Depending on the circumstances, example of matters that may be relevant when obtaining an understanding of the methods used by management in determining segment information and whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework include: Sales, transfers and charges between segments, and elimination of inter-segment amounts. Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales. The allocation of assets and costs among segments.

Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies. Appendix (Ref: Para. CA25a) Joint Policy Statement Concerning Communications with Law Firms Regarding Claims and Possible Claims in Connection with the Preparation and Audit of Financial Statements This Joint Policy Statement of January 1978 has been approved by The Canadian Bar Association 1 and by the Auditing Standards Committee of The Canadian Institute of Chartered Accountants [currently the Auditing and Assurance Standards Board]. Application and Definitions

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1. (a)

For purposes of this Statement: "law firm" includes an individual practicing alone;

(b) "auditor" means an individual unless he is a partner or member of a firm in which case it means his firm, where the context requires; (c) "claim" means a matter involving the client which is or may become litigious with respect to which (i) the law firm has been engaged to represent or advise the client and (ii) a demand or indication of demand has been communicated to or by the client, carrying with it the possibility of future loss or gain; accordingly, claims include those against third parties as well as those by third parties; (d) "possible claim" means a matter involving the client which is or may become litigious with respect to which the law firm has been engaged to represent or advise the client but a demand or indication of demand has not been communicated to or by the client; (e) "records" means the method or system used by the law firm to record services given to the client and may, but shall not necessarily, consist of claims registers, time-charge records or docket entries. 2. When a request from a client to a law firm for confirmation of claims and possible claims in connection with the preparation and audit of financial statements (the "inquiry letter") and the law firm's letter of response (the "response letter") are stated to be made in accordance with this Statement, they are deemed to be governed by and interpreted in accordance with this Statement as if it were part of both letters. 3. (a) This Statement does not apply to: legal opinions sought by the auditor;

(b) audit inquiries which may be made of a lawyer who is an employee of the client or of a lawyer in his capacity as a director of the client; and (c) audit inquiries which may be made of law firms in respect of such items as trust funds, unpaid accounts, unbilled charges and contractual obligations and commitments of the client. Form of Inquiry Letter and Response Letter 4. The inquiry letter shall be substantially in the appropriate version of the forms illustrated in Schedule A and be signed by the client. The response letter shall be substantially in the appropriate version of the forms illustrated in Schedule B and be signed by a partner of, or in the name of, the law firm. The law firm is not expected to respond to a general inquiry. Routing the Inquiry Letter and the Response Letter 5. The inquiry letter shall be addressed to the law firm. The response letter, marked

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"Privileged and Confidential", shall be addressed to the client with a separate signed copy sent directly to the auditor. Timing of Inquiry Letter and Response Letter 6. Although the inquiry letter relates to financial statements for a particular fiscal period, the client, in preparing the financial statements, and the auditor, in reporting on them, have to consider events which occur up to the date the financial statements are finalized, which would generally coincide with the date of completion of the auditors' field work. The inquiry letter will therefore specify the date as of which the response letter will take effect ("the effective date of response") which will normally be the date on which the auditor's field work will be completed. The inquiry letter should be sent to the law firm at least three weeks in advance of the effective date of response. 7. The response letter should take into consideration developments up to the effective date of response. In most instances, the normal time-lag in keeping the law firm's records, together with the time required to prepare the response letter, will result in the response letter not being available until some time after the effective date of response. Accordingly, the law firm will require a reasonable time after the effective date to prepare the response letter. 8. As there is usually a lapse of about two weeks between the completion of the auditor's field work and the release of his report, the receipt of the response letter within two weeks after the effective date specified in the inquiry letter will normally be satisfactory. Where, however, a response letter will not be available within two weeks from the specified effective date, the law firm should advise the client of the date when it will be available. The client and the auditor will then consider whether the prospective date of release of the audit report which this entails is acceptable. If it is not, the client, the law firm and the auditor should have a discussion to determine a mutually-agreeable solution to the timing problem. 9. Where circumstances require, a further written inquiry may be sent to the law firm for the purpose of updating all or part of the original response letter. Preparation of the Inquiry Letter 10. The responsibility rests with the client to list in the inquiry letter the claims and possible claims. However, particularly in smaller enterprises, the client may wish to discuss the description and evaluation of these matters with the law firm prior to preparing the inquiry letter. 11. The inquiry letter may relate to other entities which are also clients of the law firm (where, for example, the client is preparing consolidated financial statements) in which case every entity to which the inquiry relates shall be named therein and the inquiry letter shall be signed on behalf of each listed entity. 12. (a) The inquiry letter may be limited by stating that it excludes: matters of an identified type (for example, collections);

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(b)

matters involving amounts that aggregate less than a stated dollar amount.

Claims Omitted from the Inquiry Letter 13. The law firm shall specify in the response letter any claim identified in its records which is outstanding and which is omitted from the inquiry letter. Possible Claims Omitted from the Inquiry Letter 14. It is in the public interest that the confidentiality of lawyer-client communications be maintained. Accordingly, the law firm will not indicate in the response letter any possible claims which are omitted from the inquiry letter. 15. It is also in the public interest that the financial statements contain all adjustments and disclosures required for fair presentation in accordance with generally accepted accounting principles. Accordingly, the law firm will discuss with the client possible claims identified in the law firm's records but omitted from the inquiry letter with a view to ensuring that the client is informed of his responsibility to inform the auditor and to make any appropriate adjustment of, or disclosure in, the financial statements. Evaluations 16. In order to make decisions required in the preparation of its financial statements the client evaluates: (a) whether loss (or gain) ultimately resulting from each particular claim and possible claim is likely, unlikely or not determinable; and (b) the amount of ultimate loss (or gain) if reasonably estimable.

17. When a law firm confirms the reasonableness of evaluations made by the client, it is not expressing a conclusion as to the ultimate outcome, but is providing the benefit of its professional insight based on considerations which in its experience are generally relevant to the litigation and settlement of claims and which may be helpful to the client in arriving at a decision on the appropriate financial statement treatment and to the auditor in his consideration of that decision. 18. The amounts which are recorded or the information which is disclosed in the client's financial statements are not attributable to the law firm but reflect the decisions reached by the client by reference to generally accepted accounting principles, taking into account all relevant information including the comments of the law firm. 19. One of the factors which a law firm is expected to consider in determining whether it can confirm the reasonableness of the client's evaluations is the extent of its own knowledge of the matter. While there are instances where the law firm will be unable to assess the likelihood of loss (or gain) or make a reasonable estimate of the ultimate amount thereof, it is in the client's interest that the law firm make a reasonable effort to do so.

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20. While another factor considered by the law firm in reviewing the estimated amount of ultimate loss (or gain) is the probable legal costs of the claim, no separate mention need be made in the response of a normal accumulation of unbilled fees and disbursements. 21. When the law firm disagrees with the client's evaluation, the response letter should not include an evaluation but should request that the client arrange a conference (which may be by telephone) at which the client, the law firm and the auditor will discuss the matter. The law firm should endeavour to bring such a disagreement to the client's attention as soon as possible as the financial statements or auditor's report may be affected thereby. If the client and the law firm agree on an evaluation at the conference, the law firm will be in a position to confirm this in writing to the auditor. If the client and the law firm still disagree on an evaluation following the conference, the auditor will usually prepare a memorandum of the discussion and request the client and the law firm to confirm its accuracy. Confidentiality 22. Every lawyer has a duty to hold in strict confidence all information acquired in the course of the professional relationship concerning the business and affairs of a client and may not divulge any such information unless expressly or impliedly authorized by the client or required by law to do so. The client has the privilege of denying third parties access to communications between the client and the client's law firm. The response letter is a privileged and confidential communication requested by the client and given to the client and the client's auditor in connection with the preparation and audit of the financial statements. 23. The auditor's professional responsibility not to divulge information concerning a client's affairs without the client's consent applies to the response letter. It must not be quoted from or referred to in the financial statements or be furnished in whole or in part to any other party without prior written consent of the law firm. The law firm should be prepared to review the proposed wording of any note to the financial statements regarding claims and possible claims on which it has been consulted. Schedule A (Inquiry Letter) 1 Version 1 when there are claims or possible claims to be listed (On client letterhead) (To law firm) Dear Sir(s): In connection with the preparation and audit of our financial statements for the fiscal period ended (date), (which include the accounts of the following entities), 2 we have made the following evaluations of claims and possible claims with respect to which your firm's advice or representation has been sought: (Date)

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Description (name of entity, name of other party, nature, amount claimed and current status)

Evaluation (indicate likelihood of loss (or gain) and estimated amount of ultimate loss (or gain), if any; or indicate that likelihood is not determinable or amount is not reasonably estimable)

Would you please advise us, as of (effective date of response), on the following points: (a) (b) Are the claims and possible claims properly described? Do you consider that our evaluations are reasonable?

(c) Are you aware of any claims not listed above which are outstanding? If so, please include in your response letter the names of the parties and the amount claimed. This inquiry is made in accordance with the Joint Policy Statement of January 1978 approved by The Canadian Bar Association and the Auditing Standards Committee of The Canadian Institute of Chartered Accountants. Please address your reply, marked "Privileged and Confidential", to this company and send a signed copy of the reply directly to our auditor, (name and address of auditor). Yours truly, c.c. (name of auditor) (Inquiry Letter) 1 Version 2 when there are no claims or possible claims to be listed (On client letterhead) (To law firm) Dear Sir(s): In connection with the preparation and audit of our financial statements for the fiscal period ended (date), (which include the accounts of the following entities), 2 we have determined that there are no claims or possible claims with respect to which your firm's advice or representation has been sought and which are outstanding. Please confirm that there are no claims which are outstanding as of (effective date of response). If you are aware of any such claims, please include in your response letter the names of the parties and the amount claimed. (Date)

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This inquiry is made in accordance with the Joint Policy Statement of January 1978 approved by The Canadian Bar Association and the Auditing Standards Committee of The Canadian Institute of Chartered Accountants. Please address your reply, marked "Privileged and Confidential", to this company and send a signed copy of the reply directly to our auditor, (name and address of auditor). Yours truly, c.c. (name of auditor) Schedule B (Response Letter) Version 1 responding to Inquiry Letter Version 1 Privileged and Confidential (To client) Dear Sir(s): This reply to your inquiry letter of (date) is made in accordance with the Joint Policy Statement referred to in that letter. We confirm, based on an examination of our records, that as of (effective date of response) the claims and possible claims referred to in your letter: (a) have been properly described (except for the following: 1) (Date)

(b) have been reasonably evaluated (except for the following with respect to which we request that you arrange a conference at which our (identify individual) will discuss the matter with you and your auditor: 1) (c) include all claims which are outstanding (except for the following: Amount Claimed 1)

Parties

This letter should not be quoted from or referred to in your financial statements or in dealings with third parties without our prior written consent. Yours truly, c.c. (Signed copy to auditor)

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(Response Letter) Version 2 responding to Inquiry Letter Version 2 Privileged and Confidential (To client) Dear Sir(s): This reply to your inquiry letter of (date) is made in accordance with the Joint Policy Statement referred to in that letter. We confirm, based on an examination of our records, that as of (effective date of response) there are no claims which are outstanding. 1 This letter should not be quoted from or referred to in your financial statements or in dealings with third parties without our prior written consent. Yours truly, c.c. (Signed copy to auditor) (Date)

Footnotes
1. CAS 330, The Auditor's Responses to Assessed Risks 2. CAS 500, Audit Evidence 3. CAS 705, Modifications to the Opinion in the Independent Auditor's Report 4. CAS 600, Special Considerations Audits of Group Financial Statements (Including the Work of Component Auditors) 5. CAS 620, Using the Work of an Auditor's Expert 6. CAS 330, paragraphs 22-23 7. CAS 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Canadian Auditing Standards, paragraph A48 8. CAS 705, paragraph 13 9. CAS 505, External Confirmations

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10. CAS 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures 11. CAS 700, Forming an Opinion and Reporting on Financial Statements, paragraph 41 1. and by the Council of the Bermuda Bar Association. 1. The letter should be appropriately modified if the client advises that certain matters have been excluded in accordance with paragraph 12 of the Joint Policy Statement. 2. Delete if inapplicable. If applicable, refer to paragraph 11 re signing of the inquiry letter. 1. The letter should be appropriately modified if the client advises that certain matters have been excluded in accordance with paragraph 12 of the Joint Policy Statement. 2. Delete if inapplicable. If applicable, refer to paragraph 11 re signing of the inquiry letter. 1. Delete if inapplicable. 1. Delete if inapplicable. 1. Delete if inapplicable. 1. Delete if inapplicable and substitute the following: We have identified in our records the following claim(s) which is (are) outstanding as of (effective date of response): Parties Amount Claimed

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