 In this presentation we will discuss the effects of litigation with regards to an audit engagement and the concept of independence. Commencement of litigation by management alleging deficiencies in audit work. First a word from our sponsor. Well actually these are just items that we picked from the YouTube shopping affiliate program but that's actually good for you because these aren't things that we're just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and used ourselves. Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well and I'm trusting the Acer brand more and more as I use the monitor. I have a 27 inch monitor which I think is ideal for what I do which is of course the screen recording and the editing. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model given you access to all the courses. Courses which are well organized have other resources like excel files and pdf files to download and no commercials. For the entity would generally impair independence so obviously if we're auditing a firm or we're going to be engaged to audit a firm and the firm is engaging in some litigation against the audit firm with regards to the work related to the audit that would impair independence. If we're going to go through the audit process in the future we have a problem here with regards to the pending litigation that would impair independence. Even a situation where there's expressed intent on the part of management to start litigation against the CPA firm even if management has not started any litigation if there's intent by management to start the litigation against the CPA firm that could be a problem. So expressed intent on the part of management to start litigation against the CPA firm alleging deficiencies in audit work could also impair independence if the auditor feels that it is probable that a claim will be filed. So if we're going to say okay they're kind of threatening to have a claim here if we feel that that's probable that they may file that claim again problem with independence with regards to going through an audit process because of this situation because of course if we think about a lawsuit if the lawsuit is going to go in place that can be thought of as a kind of threat or a kind of potential liability in the future so someone is obviously threatening to sue you or have litigation against you with regards to work that was done in the past with deficiencies of work that could result they're basically saying we're going to want some type of compensation that's what a litigation lawsuit basically does in the future and that if that would put pressure on the CPA firm possibly to have a favorable opinion in order for the litigation to go away and that wouldn't cause independence to be a problem. So if there's going to be a threatened litigation involved obviously we don't want the audit another audit to be in the middle of the of the threatening litigation you got to basically if that's going to be the case then the litigation needs to go through and the auditor would not want to be involved in an audit during that process because of course it would compromise independence and again you can just see just from a logical standpoint these rules kind of make sense because if you're an outside individual and you're looking at the independence of an of the audit even if the auditor did the best job they could have and they said hey you know you know they were threatening to sue us but we did the best job we could and we looked at everything we're very thorough and we give a favorable opinion if someone else looks at that they're going to say well you only gave a favorable opinion because they're threatening to sue you which would cost you a lot of money and and that would obviously be a problem with independence there's nothing the auditor can do about that appearance with with the diligence of their work all they can do is basically say you know independence is a problem therefore you know disengaged from that type of situation. Commitment of litigation by the CPA against the management alleging management fraud or deceit would generally impair independence so obviously if the CPA firm was going to engage in litigation against management with relation to fraud or deceit then you wouldn't want to be going forward with another audit in that process and that would that would be obvious even past the point of independence obviously it could be a violation of independence but if there's a situation where you suspect a lack of integrity in upper management within the organization that you're auditing then that's typically part of the planning process or the thinking about whether or not you want to continue with an engagement process to think about the integrity of management and if you think that there's lack of it then you wouldn't really want to proceed with the engagement in any case.