Advanced Audit and Assurance (International) · Advertising, tendering, and obtaining professional work and fees

Audit Fees, Pricing and Low-balling Threats

Updated 11 October 2026 · Fact-checked

Audit fee threats arise when the way a firm is paid could weaken independence or objectivity. Low-balling, heavy dependence on one client, overdue fees and contingent fees all create self-interest threats. To answer, identify the fee issue, name the threat, assess its significance, then propose safeguards such as review, disclosure or refusing the work.

Understand Fees, Pricing and Low-balling Threats

An audit firm is paid by the company it audits. That is the root of the problem. If the firm needs the money, it may be tempted to go easy on the client. The IESBA Code calls this a self-interest threat. Fees can also create an intimidation threat, for example when a client threatens to replace the auditor over a fee dispute or a difficult audit judgement.

The Code does not stop a firm from earning fees. It says the fee must be fair and must allow the work to be done properly. The firm needs enough time and competent staff to meet professional standards. Charging a lower fee than another firm is not unethical in itself.

Low-balling means quoting a fee much lower than the previous auditor or competitors. The risk is that the firm cuts hours or uses less experienced staff to make a profit. That threatens professional competence and due care. Safeguards include telling the client the basis of the fee, and showing that the firm has assigned enough time and appropriately skilled staff to meet the standards.

Fee dependency arises when one client, with its related entities, provides a large share of the firm's total fees. For a public interest entity (PIE), the Code uses 15% of total fees. Tell those charged with governance (TCWG) once the share first exceeds 15%, so the position is not a surprise in the second year. If the share exceeds 15% for two consecutive years, the firm discloses the fact and the extent to TCWG. It also has a professional accountant from outside the firm review the second year's audit. This review is applied before the audit opinion on the second year's financial statements is issued (a pre-issuance review). The alternative is a post-issuance review, after that opinion is issued and before the opinion on the following year. For non-PIEs the Code sets no fixed percentage. The firm judges how significant the proportion is, and it can apply safeguards such as a pre- or post-issuance review.

Overdue fees can look like a loan from the firm to the client. The firm now has a stake in the client's survival, and that is a self-interest threat. The longer and larger the debt, the greater the threat. Safeguards include getting payment before the audit report is issued, using a reviewer outside the audit team, or considering whether to continue as auditor. Contingent fees are fees that depend on an outcome. For an audit they are not allowed, because no safeguard can reduce the threat enough. For non-audit services to an audit client they are restricted. The Code does not allow them where the fee is material to the firm, or where the outcome depends on a current or future audit judgement on a material matter. A tax fee that rises with the size of a tax reduction is a good example. The tax saving feeds into the tax figure in the financial statements, so the fee depends on a material matter and is not permitted. Recommend removing it. National rules may be stricter. Commissions received for referring an audit client to a third party also create self-interest threats, and you should treat them as unacceptable for audit clients.

Key rules to remember

Fee dependency percentage: Fee dependency % = (Total fees from client and related entities ÷ Total fees of the firm) × 100; Include audit and non-audit fees. For a PIE, the Code's trigger is more than 15% for two consecutive years.
PIE fee dependency response: Fees > 15% for 2 consecutive years → disclose the fact and extent to TCWG and arrange a review of the second year's audit by a professional accountant outside the firm; Tell TCWG once fees first exceed 15%. The review is pre-issuance (before the opinion on the second year) or post-issuance (after it, before the next year's opinion). If fees stay above 15%, keep communicating and reviewing each year.
Non-PIE fee dependency: No fixed Code percentage; judge significance and apply safeguards; Do not quote 15% as a rule for private companies. Say the Code sets no fixed percentage and a firm may use its own policy limits.
Contingent fee on an audit: Audit fee depending on a result or outcome = not permitted; Self-interest threat is too significant for any safeguard to reduce it to an acceptable level.
Low-balling test: Fee must allow adequate time and appropriately skilled staff to meet professional standards; A low fee is acceptable only if quality is not compromised. Disclosing the fee basis to the client is a common safeguard.
Overdue fee test: Size of debt × length of time overdue = significance of the threat; Large, long-overdue fees can be seen as a loan to the client. Resolve them before issuing the report.

How to solve Fees, Pricing and Low-balling Threats questions

Use this method for any fee or pricing ethics scenario. Link every point to the facts given.

1Identify the fee issue from the scenario: low quote, dependency, overdue debt, contingent basis or commission.
2Name the threat and tie it to a fundamental principle. Usually it is self-interest, sometimes intimidation, affecting integrity, objectivity or professional competence and due care.
3Check the client type. A PIE brings stricter rules and the 15% test. A non-PIE is judged on significance.
4Do the numbers if given. Calculate the percentage of total fees, the size of the discount or the age of the debt, and compare with the relevant benchmark.
5Assess whether the threat is significant or whether it is prohibited outright, such as a contingent audit fee.
6Propose specific safeguards: reviewer outside the audit team, disclosure to TCWG, payment before issuing the report, extra staff time, or declining the work.
7Conclude with a clear recommendation: accept, accept with safeguards, or decline or resign. Add the professional skills point by advising the partner and TCWG in suitable language.

Quickest way: Threat, test, safeguard, decision

When to use it: Use it in Section B or when a fee issue appears inside a longer Section A case and you have only a few minutes.

Write the fee issue in one line, with the number if given.
Name the threat and principle in one sentence.
Give the benchmark or rule: 15% for PIE dependency, ban on audit contingent fees, or adequate time and staff for pricing.
Apply the benchmark to the facts and say whether the threat is significant.
Give two or three safeguards, each linked to the issue, then a firm conclusion.

Common mistakes in Fees, Pricing and Low-balling Threats

Saying low-balling is unethical in itself.
Students assume a cheap fee is automatically wrong.
Fix: State that the fee level alone is not a breach. The threat is to competence and due care, so the firm must show it can still do a proper audit and tell the client the fee basis.
Applying the 15% fee dependency test to every client.
Students memorise one number and forget the client type.
Fix: The 15% trigger is for PIEs and applies when it is exceeded for two consecutive years. For non-PIEs, say the Code sets no fixed percentage and the firm judges significance.
Leaving out fees from related entities and non-audit services.
Students only use the audit fee when calculating dependency.
Fix: Add all fees from the client and its related entities, audit and non-audit, before dividing by the firm's total fees.
Treating overdue fees as only a credit control problem.
The issue looks commercial rather than ethical.
Fix: Explain that unpaid fees can resemble a loan to the client, creating a self-interest threat. Recommend settling the debt before the report is issued.
Suggesting safeguards for a contingent audit fee.
Students are used to listing safeguards for every threat.
Fix: Say such a fee is not permitted and the firm should refuse to work on that basis. Do not offer safeguards.
Giving a generic list of safeguards with no link to the scenario.
Students recite rather than apply.
Fix: Pick safeguards that fit the facts, such as extra staff hours for low-balling or a review by someone outside the audit team for dependency. Say why each one works.

Worked examples

Example 1

Delta Firm has total annual fees of $20 million. Its audit client Zeta, a listed company, was charged audit fees of $2.4 million, non-audit fees of $0.9 million and $0.3 million to a subsidiary, a total of $3.6 million this year. Last year Zeta and its related entities generated $3.0 million of the firm's $19 million total fees. Assess the ethical implications.

Show the solution

Calculate this year's dependency: $3.6m ÷ $20m = 18%.
Calculate last year's dependency: $3.0m ÷ $19m = 15.8% (to one decimal place).
Zeta is listed, so it is a PIE. Both years exceed 15%, so the two consecutive years condition is met. The firm should have told TCWG after last year's exceedance, and now has the disclosure and review requirements for the second year.
The threat is self-interest, and possibly intimidation, because losing Zeta would hit the firm's income. It affects objectivity and independence.
Required response: disclose the fact and extent of the fees to TCWG. Arrange a review of the second year's audit by a professional accountant outside the firm. The review is applied before the audit opinion on this year's financial statements is issued. A post-issuance review, after the opinion and before next year's opinion, is the alternative.
Recommend that the firm reduces its reliance on Zeta over time, for example by winning other clients or by reducing non-audit services. If the percentage stays above 15%, repeat the disclosure and review each year.

Answer: Dependency is 18% this year and about 15.8% last year, so Zeta exceeds 15% for two consecutive years. Delta must disclose the fact and extent to TCWG and have the second year's audit reviewed by an independent professional accountant, before the opinion is issued. The firm should also plan to reduce its dependency.

Example 2

Your firm is tendering for the audit of Karo, an unlisted manufacturer. The outgoing auditor charged $250,000. The partner proposes a fee 40% lower and suggests adding a $50,000 bonus fee for the tax advice only if Karo's tax bill is reduced. Karo also owes your firm $60,000 for last year's consulting work, unpaid for ten months. Discuss the ethical issues.

Show the solution

Calculate the proposed fee: $250,000 × 60% = $150,000, which is a $100,000 reduction.
Low-balling: the fee is much lower than the previous auditor's. The threat is to professional competence and due care, because the firm may cut hours or use junior staff. The fee is not unethical in itself if the firm can still do the audit properly. Safeguards: budget realistic hours, assign suitably skilled staff, and tell Karo the basis on which the fee is calculated.
Contingent fee: the $50,000 bonus is for tax advice, a non-audit service, and depends on a result. This creates a self-interest threat. The bonus depends on reducing Karo's tax bill, and that figure feeds into the tax charge in the financial statements the firm will audit. The outcome therefore depends on a material matter, so the bonus is not permitted. National rules may be stricter. Recommend removing it and charging a fixed or time-based fee instead.
Overdue fees: $60,000 unpaid for ten months looks like a loan to Karo. The firm has a financial stake in Karo's survival, which is a self-interest threat. Safeguards: ask Karo to settle the debt before accepting the audit, or before issuing the first report, and consider a review by a partner outside the engagement.
Overall recommendation: accept only if the fee gives enough time and staff, the contingent element is removed and the overdue debt is resolved. If not, decline the tender.

Answer: The proposed fee is $150,000. Low-balling is acceptable only if audit quality is protected. The $50,000 contingent tax bonus is not permitted and must be dropped. The overdue $60,000 should be settled before the firm takes on or reports on the audit. If these conditions cannot be met, the firm should decline.

Exam tips

Always do the arithmetic when figures are given. Marks are awarded for the percentage and a comparison with the benchmark, not just for naming the rule.
State the client type. A PIE audit means the 15% test and a pre-issuance review. Without that distinction you lose marks.
Name the principle at risk, such as objectivity or professional competence and due care, and link the threat to it. Do not just write 'self-interest'.
Make safeguards specific and realistic for the case. Where a practice is prohibited, such as a contingent audit fee, say so and recommend refusing it.
Finish with a decision and write it as advice to a partner or TCWG. This earns professional skills marks for communication and judgement.

Practice questions from Advertising, tendering, and obtaining professional work and fees

Fees, Pricing and Low-balling Threats: frequently asked questions

Is low-balling an audit fee against the IESBA Code?

No, quoting a low fee is not prohibited in itself. The Code requires that the fee still allows the work to be done to professional standards. The firm must be able to show it has enough time and skilled staff, and it normally tells the client the basis of the fee.

What is the 15% fee dependency rule for audits?

For a PIE audit client, if total fees from the client and its related entities exceed 15% of the firm's total fees for two consecutive years, the firm discloses the fact and extent to TCWG. It also arranges a review of the second year's audit by a professional accountant outside the firm, before the opinion is issued (or after it, as a post-issuance review). It is wise to tell TCWG once fees first exceed 15%. If the fees stay above 15%, the firm keeps doing this each year. For non-PIEs the Code sets no fixed percentage.

Can an audit firm charge a contingent fee for an audit?

No. A fee that depends on the result of the audit creates a self-interest threat that no safeguard can reduce enough. For non-audit services to an audit client, contingent fees are restricted. They are not permitted if the fee is material to the firm or the result depends on a current or future audit judgement on a material matter. A tax bonus linked to a lower tax bill that affects the financial statements is an example, so you should recommend removing it.

How do overdue fees affect auditor independence?

Large fees unpaid for a long time can look like a loan from the firm to the client. That gives the firm a financial interest in the client, a self-interest threat. The firm should try to get the fees paid before issuing the report, consider an independent review, and think about whether to continue.