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ma’am the Engagement letter includes the following two things among others:
-Limitations to the auditor’s liability
-Any obligations to provide audit working papers to other parties.So could you explain these two(with examples if possible)?
Auditor’s liability isn’t examinable in AA but this means that if, for example, the directors of the audit cliient agree to indemnify the auditor against liability (in the event that the auditor is sued by a third party in connection with their audit opinion), this would need to be included in the engagement letter. (Because the engagement letter is the legal contract between client and auditor.)
Because the auditor’s working papers are the property of the auditor, the auditor cannot be obliged to provide them to anyone else in the absence of a legal right or obligation. In a group audit scenario (again not examinable in AA), if the client is a subsidiary and the parent is audited by a different firm of auditors, the auditor of the subsidiary must be obliged in law to provide the parent’s auditors with their audit working papers. If there is no statutory obligation, it would have to be make a contractual term in the engagement letter.
Professor i don’t understand the rational as to why the client might want to reimburse the auditors, unless the client was the one that asked the auditors to issue an unmodified opinion despite the irregularities and malpractices in client’s business, in which case it should be illegal to pay the auditors any sum.
Not necessarily – indemnity that reduces the auditor’s exposure to litigation risk might be the difference between an auditor agreeing to take on a reputationally risky client – or not. This isn’t examinable and only a very superficial explanation – any indemnification of the auditor would have to be disclosed in the financial statements and approved by the members in general meeting also.
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