What should an auditor do if litigation between the firm and client is imminent?

When litigation between the firm and the client is imminent, resigning from the engagement becomes the most prudent course of action for the auditor. This decision is primarily based on the potential conflict of interest and the risk of impairing the independence and objectivity required for an audit. Auditors must maintain a clear separation from the clients they serve to ensure unbiased judgment in their findings and reports.

Continuing with the audit could jeopardize the auditor's impartiality, as the ongoing dispute may emotionally or professionally affect how the auditor conducts the audit or interprets findings. Resignation allows the auditor to avoid any perceived or actual conflicts that could compromise the integrity of the audit process.

While consulting with legal advisors could provide valuable insight into the situation, it does not mitigate the fundamental risk associated with conducting an audit under strained conditions. Similarly, negotiating terms or managing risks might seem feasible, but they do not adequately address the core issue of independence, which is crucial to the auditor's responsibility. Thus, resigning from the engagement effectively safeguards professional standards and the interests of both parties.