ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability

Brightwell LLP is considering a new audit client, Kestrel Mining, which is highly leveraged, has a history of aggressive revenue recognition and operates in an industry with frequent litigation. The engagement partner is concerned about the firm's exposure to claims. Which response is the most appropriate way of managing the firm's litigation risk at the acceptance stage?

The firm should assess the client's integrity and risk before acceptance, decide whether it can manage that risk, and meet any insurer notification requirements. Insurance is not a substitute for sound acceptance procedures, cutting audit work increases exposure, and blanket negligence exclusions are generally not effective.

1. AAccept the client and rely on the PII policy, since insurance fully covers any loss from a claim
2. BAccept the client and reduce audit work on revenue to keep fees competitive
3. CAssess client integrity and risk before acceptance, consider whether the firm can manage the risk, and inform the insurer if required by the policy termsCorrect
4. DAccept the client only on condition that it signs a clause excluding the firm from any liability for negligence