6.5 Legal Protective Clauses in Engagement Letters
Generally, legal protective clauses to mitigate the auditor’s potential
liability are permitted in AICPA audit engagement letters. The most common legal
protective clause that is included in such letters is a release and indemnification
for management misrepresentations. In certain circumstances, such as some financial
statement audits performed in connection with a transfer of ownership interests,
other legal protective clauses (e.g., a limitation of liability) may also be
included in AICPA audit engagement letters.
However, the SEC’s independence rules do not permit inclusion of legal protective clauses in audit
engagement letters. When an entity is an issuer or the auditor is engaged to perform an audit
in accordance with PCAOB standards, auditors are subject to, and must comply with, the SEC’s
independence rules; accordingly, auditors do not include such legal protective clauses in PCAOB audit
engagement letters.