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Handle with care

Clarity on enforceability of obligations in firms’ and clients’ contracts can be hard to find, so auditors should approach with caution says Christopher Arnull.

Contracts will often need to be considered by auditors. Client contracts might provide context to the client’s business and financial position, or help the auditor to consider the strength of material revenue covenants, liabilities and going concern issues. Auditors have their own contracts, too – and for all contracts, issues around enforceability can arise.

Auditors will look for clear obligations that can be enforced, but often obligations are softened during the contract negotiation process. This can take the form of altering things that “must” or “shall be done” to things that the relevant party will “try to do”. The value of an undertaking to try to do something, rather than just do it, can be unclear.

Auditors might encounter several variations on contractual obligations to try or endeavour to do something. The usual options follow what is generally seen as a sliding scale of duty, starting with “reasonable” and ending with “best”: so typically we might see “reasonable endeavours”, “all reasonable endeavours”, and “best endeavours”.

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