Audit litigation risk poses threat to audit failure. Audit litigation also poses threat to auditors image. I want to know whether and how auditors take these challenges into consideration while charging audit fees on any accepted audit job with perceived threats as mentioned above.
Litigation risk is a cost to any business not just auditors. In any case professional indemnity insurance is taken out, which is part of the overhead cost built into the audit charge out rates. Beyond that, each audit firm will make its own judgement as to how much risk - over and above PI insurance coverage - needs to be factored into likely costs. Each firm will take a different view on that depending on the partners' risk appetite.
Before accepting any audit engagement, auditors study the situation of their potential client thoroughly. This is done especially when the client is new to the audit firm. Such study includes assessing the potential risks, such as litigation risks, of the engagement. Yes, the audit firm takes such risks into consideration when estimating the audit fees; however, more importantly is the auditors' decision whether to accept or decline the risky client. If accepted, then the auditors should mention such risks, especially the significant ones, in their auditor's report according to the relevant standards and principles.
Of course the auditor should take these risks when determining the audit plan as well as when determining audit fees