When are Auditors Liable to their Client? 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:

  1. Duty of Care owed

    • This is obvious for an audit client (though not necessarily for 3rd Parties)

  2. Breach of that Duty

    such as..

    • Incorrect Opinion

    • ISA's not followed correctly

  3. Client suffered a Financial Loss

    • The client wouldn't have made this loss otherwise

Client3rd party
Duty of care exists?AutomaticNeeds proving
Breached?Needs provingNeeds proving
Loss made?Needs provingNeeds 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:

    1. Fair and reasonable

    2. For the current year only

    3. Made clear as part of any tender process

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