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

Harlow & Co, audit firm, is negotiating the engagement letter for a new audit client, Zenith Ltd. The client's finance director suggests adding a clause that would remove the firm's liability entirely, even for negligent audit work. Which statement best describes the position under the usual legal approach in most jurisdictions?

A clause removing all auditor liability for negligence is generally unenforceable, because company law in many jurisdictions makes such exclusions void. Signature by the finance director or a lower fee does not change this, as statute overrides contractual terms in this area.

1. ASuch a clause is generally unenforceable because liability for negligence to the audited company cannot be excluded entirely where the law prohibits itCorrect
2. BSuch a clause is valid provided the finance director signs the engagement letter
3. CSuch a clause is valid because the engagement letter is a contract and contract terms always override statute
4. DSuch a clause is valid if the audit fee is reduced accordingly