How do you test a provision for litigation?
A core Audit & Assurance interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
ISA 540 + IAS 37: (1) Obtain the list of pending cases from management and legal counsel. (2) Send legal confirmation letters to external lawyers (ISA 501). (3) Evaluate probability of outflow (probable >50% = recognize). (4) Test management’s estimate of the amount. (5) For significant cases: discuss with the firm’s legal specialist. (6) Assess disclosure adequacy.
WHAT INTERVIEWERS LISTEN FOR
- ✓Obtain list of pending cases
- ✓Send legal confirmation letters
- ✓Evaluate probability of outflow
- ✓Test management's estimate
- ✓Assess disclosure adequacy
COMMON MISTAKES
- ✗Ignores probability threshold
- ✗Relies solely on management
- ✗Omits legal specialist involvement
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