ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability
Harlow & Co, an audit firm, is reviewing its arrangements for professional indemnity insurance (PII). Which of the following best describes the main purpose of PII for an audit firm?
PII gives an audit firm financial protection against negligence claims, covering damages and legal defence costs. It transfers part of the financial risk to an insurer. It does not remove the duty of care, replace quality control procedures, or prevent client misstatements.
- AIt removes the auditor's duty of care to third parties who rely on the audit report
- BIt provides financial protection against the cost of claims for negligence and related defence costsCorrect
- CIt allows the firm to avoid performing engagement quality reviews on higher risk audits
- DIt guarantees that a client will not suffer a material misstatement in its financial statements
Explanation
PII is a risk transfer mechanism that meets the cost of damages and defence costs arising from negligence claims. It does not remove the duty of care, replace quality management procedures, or prevent misstatements in client accounts.
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