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

Marlow & Co audits Kestrel Ltd. The audit engagement letter states that the audit report is prepared solely for Kestrel's shareholders as a body. A prospective investor, Ms Osei, buys shares after reading the audited statements and loses money because of an undetected misstatement. Which statement best describes the effect of the disclaimer wording on the firm's exposure to Ms Osei?

Limiting the report to shareholders as a body can help show the auditor did not assume responsibility to other readers like Ms Osei. However, it is not an absolute defence. Its effectiveness depends on the applicable law and on whether the wording is reasonable and was properly communicated.

  1. AIt removes all liability because disclaimers are always binding on any reader
  2. BIt has no relevance because duty of care is determined only by the audit fee paid
  3. CIt may help the firm show no assumed responsibility to Ms Osei, but its effectiveness depends on law and on whether it is reasonable and brought to her attentionCorrect
  4. DIt transfers liability to Kestrel's directors automatically

Explanation

Wording limiting the audit report to members helps demonstrate that the auditor did not assume responsibility to other parties. Its effect depends on jurisdictional law and on reasonableness, and a disclaimer cannot be assumed to be an absolute shield. Option A overstates this; fees do not decide duty; liability does not transfer automatically to directors.

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