Legal Privilege and it's Interaction with the Audit (TECH 01/25 AAF)

The relationship between an auditor and an audited entity often requires the audited entity to share privileged information with its auditor so that the auditor can properly understand the financial risks to the audited entity of non-compliance with laws and regulations, claims, potential claims and regulatory investigations and proceedings. The audited entity may be reluctant to share privileged information to protect any claims to legal privilege.

However, this needs to be balanced with the requirement for an auditor to obtain sufficient appropriate audit evidence to carry out their role properly. Both the audited entity and the auditors need to have sufficient procedures in place to discharge their responsibilities.

High Court rulings (such as A v B and the Financial Reporting Council [2020] EWHC 1491) held that auditors must form their own view on an audited entity’s claim to legal privilege when responding to its regulator’s notice to produce documents. This case has led the Audit and Assurance Faculty to review its previous guidance Tech 02/95 AAF on The Ascertainment and Confirmation of Contingent Liabilities arising from pending legal matters. This new technical release provides practical guidance to auditors on:

• What legal privilege is and why it is important for auditors to understand how to deal with privileged information in the context of an audit and how privilege may be lost (Section 2)
• Directors’ responsibilities in relation to recognition and disclosure of liabilities (Section 3).
• Auditors’ duties (through various auditing standards) which could be impacted by legal privilege. This section discusses the importance of obtaining sufficient appropriate audit evidence and provides guidance on the type of evidence that could be obtained (Section 4).
• The extent to which auditors are entitled to call for legally privileged information and whether the audited entity can withhold such information (Section 5).
• How auditors should report on audits where legally privileged information is withheld (Section 6).
• How and what to record in the audit file regarding legally privileged information, sufficient to support the audit opinion, and how to deal with requests from third parties (including regulator requests) and limited waiver agreements (Section 7).
• Case law relevant to this subject matter (Appendix 1).
• Types of legal privilege (Appendix 2).