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

Marlowe Audit LLP was engaged to audit Tandem Co. The engagement letter includes a clause limiting Marlowe's liability to a fixed amount, agreed by Tandem's shareholders. Marlowe's partner later learns that a material fraud was concealed by management and the audit work did not follow ISAs. Which statement best describes how auditors may seek to manage liability exposure in this situation?

A liability limitation agreement may cap the auditor's exposure to the client where the local law permits it. It does not relieve the auditor of the duty to follow ISAs and ethical requirements, and it does not generally bind third parties who are not parties to the agreement.

  1. AA liability limitation agreement may reduce exposure to the client in permitted jurisdictions, but it does not remove the need to comply with ISAs and ethical requirementsCorrect
  2. BLimitation clauses make compliance with ISAs optional
  3. CLimitation clauses always protect the auditor from claims by third parties
  4. DA limitation clause is effective only if the auditor does not carry professional indemnity insurance

Explanation

Where law allows, liability limitation agreements can cap exposure to the client, but they do not alter the auditor's professional obligations under ISAs and the Code. They do not generally bind third parties who are not party to the agreement. Insurance is complementary, not a condition.

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