ACCA AAA INT Syllabus B. Professional and Ethical Considerations - When are Auditors Liable to their Client? - Notes 1 / 3
The auditor has a contract with her client
This means that the contract can be broken by the auditor and so become liable
This begins when it can be shown that the auditor didn't use "reasonable skill and care"
How can you show "Due skill and care"?
Applying IFRS and ISA's correctly
Following ethical standards
Following engagement letter terms
Using properly trained and competent staff
Being Sued for Negligence
This means 3 tests need to be proven:
Duty of Care owed
This is obvious for an audit client (though not necessarily for 3rd Parties)
Breach of that Duty
such as..
Incorrect Opinion
ISA's not followed correctly
Client suffered a Financial Loss
The client wouldn't have made this loss otherwise
Client | 3rd party | |
Duty of care exists? | Automatic | Needs proving |
Breached? | Needs proving | Needs proving |
Loss made? | Needs proving | Needs proving |
LIMITING LIABILITY TO YOUR CLIENT
Reducing liability for statutory audit work is normally not allowable
However there are options:
Limited Liability Partnerships
A separate legal entity the LLP itself is liable to the full extent of its assets
The liability of the members will be however limited to the investment made in the LLP
Negligent Partner will still be sued personally - but non-negligent partners are protected
Limited Liability Agreements
Here companies limit auditor liability by contract - needs shareholder approval
It must be:
Fair and reasonable
For the current year only
Made clear as part of any tender process