Advanced Audit and Assurance (International) · Professional and ethical developments

Auditor Independence, Non-Assurance Services and Fees

Updated 11 October 2026

Auditor independence means being free of influence that compromises judgement (independence of mind) and avoiding facts that make a reasonable observer doubt your objectivity (independence in appearance). To solve a question, identify the threat, assess its level, apply safeguards, and decline the work or engagement if safeguards cannot reduce the threat to an acceptable level.

Understand Auditor Independence, Non-Assurance Services and Fees

Independence is the foundation of audit credibility. Users trust the opinion only if the auditor is objective. The IESBA Code of Ethics (International Independence Standards) requires firms to be independent of audit clients.

There are two parts. Independence of mind is the state of mind that lets you give an opinion without being affected by pressure. Independence in appearance is avoiding facts and circumstances so significant that a reasonable and informed third party would conclude your integrity, objectivity or scepticism was compromised. You can fail on appearance even if your mind is clear.

The Code uses a threats-and-safeguards approach. The threats are self-interest, self-review, advocacy, familiarity and intimidation. You identify the threat, evaluate whether it is at an acceptable level, and address it by eliminating the circumstance, applying safeguards, or declining or ending the engagement. Some situations have no safeguard.

Non-assurance services (NAS) such as tax, IT, valuation, internal audit, accounting or recruitment help create self-review and management responsibility threats. The key rule: never take on a management responsibility for an audit client. The Code also bars a firm from providing a NAS to an audit client that is a public interest entity (PIE) where a self-review threat would arise. Two examples matter most for a PIE audit client:

Preparing accounting records and financial statements is prohibited, except in an emergency. Emergency exceptions are very limited.
Valuation services are prohibited where the valuation would have a material effect on the financial statements and involves a significant degree of subjectivity. A valuation that is not material, or has little subjectivity, is not caught by this prohibition, but you must still assess the threat.

Communication with those charged with governance (TCWG) is required. Check which services the firm performed and whether the audit will rely on their output.

Fees create self-interest and intimidation threats. If fees from one client are a large share of the firm's total fees, the firm's dependence on that client threatens its independence. For a PIE audit client, where the total fees (audit and other) from the client exceed 15% of the firm's total fees for two consecutive years, the firm discloses this to TCWG and communicates the safeguard it will use. The 15% test is made on a firm-wide basis. A pre-issuance review applies before the opinion on the second year's financial statements. It is carried out by an engagement quality reviewer or by an external professional accountant or professional body. For later years in which the fees continue to exceed 15%, the firm discloses the position again and applies a pre-issuance or post-issuance review as the Code allows. For non-PIEs, a 'large proportion' test applies.

Overdue fees need care too. Where a significant part of fees remains unpaid for a long time, especially fees for prior-period services, a self-interest threat may arise. The firm should consider whether the overdue fees might be regarded as equivalent to a loan to the client. It should discuss the position with TCWG, consider whether the amount is significant and whether the firm can continue to act. It may decide that the report cannot be issued until the fees are paid. This is a judgement, not a fixed rule.

Contingent fees are prohibited for audit engagements. For NAS to an audit client they are prohibited where the fee is, or may be, material to the firm, or where the fee depends on the outcome of a judgement about a material amount in the financial statements. For PIE audit clients, contingent fees for NAS are prohibited. Low-balling is a threat if the quoted fee is so low that quality may suffer.

Key rules to remember

Two aspects of independence: Independence = independence of mind + independence in appearance; Name both in your answer. Appearance is judged by a reasonable and informed third party.
Five threats: Self-interest, self-review, advocacy, familiarity, intimidation; Label each issue with the right threat. Do not just say 'independence is threatened'.
Threat response: Identify → evaluate → address (eliminate, safeguard, or decline/end); If no safeguard can reduce the threat to an acceptable level, decline or end the engagement.
Management responsibility rule: No management responsibility for an audit client; Making decisions, or taking responsibility for controls or financial statements, is not permitted at all.
PIE NAS rule: PIE audit client: no NAS where a self-review threat would arise. Preparing accounting records and financial statements is prohibited (except in an emergency). Valuation services are prohibited where the valuation has a material effect on the financial statements and involves a significant degree of subjectivity.; State the self-review prohibition and give both conditions for valuations (material effect and significant subjectivity). Emergency exceptions are very limited. Also mention communication with TCWG.
Fee dependency for PIE: PIE audit client: total fees (audit and other) from the client > 15% of the firm's total fees for two consecutive years → disclose to TCWG and communicate the safeguard; pre-issuance review before the opinion on the second year's financial statements; in later years while fees continue to exceed 15%, disclose and apply a pre-issuance or post-issuance review as the Code allows; The 15% test is on a firm-wide basis. The pre-issuance review is by an engagement quality reviewer or an external professional accountant or body. Do not state the post-issuance review as a fixed later-year rule. For non-PIEs, the Code uses a 'large proportion' test, so refer to the firm's size and the client's importance to it.
Overdue fees: Significant fees unpaid for a long time (especially prior-period fees) → consider whether they are equivalent to a loan to the client; Raise this as a self-interest threat. Discuss with TCWG, assess significance and whether the firm can continue to act. The firm may decide the report cannot be issued until the fees are paid, but this is a judgement, not a fixed rule.

How to solve Auditor Independence, Non-Assurance Services and Fees questions

Use this method for any independence or NAS scenario. It keeps your answer structured and scores both technical and professional skills marks.

1Read the requirement. Decide if you must identify threats, evaluate them, recommend actions, or draft a communication.
2Underline facts in the scenario: client type (PIE or not), service, fee size, relationships, timing.
3Name each threat precisely (self-interest, self-review, advocacy, familiarity, intimidation) and tie it to a fact.
4Evaluate the level: is it significant? Consider PIE status, materiality of the service to the financial statements, and fee size.
5Recommend action: stop the service, use a separate team, independent review, rotate staff, or resign if no safeguard works.
6State the specific rule where relevant, e.g. no management responsibility, PIE NAS restriction, fee dependency disclosure.
7Say who to inform: the engagement partner, the ethics partner, and TCWG for a PIE or significant matters.
8Conclude clearly: accept, accept with safeguards, or decline.

Quickest way: Threat-Fact-Action in three lines

When to use it: Use when time is short, such as a 5-mark ethics sub-requirement in Section A.

Write the threat name and the scenario fact that causes it.
Write why it matters, using PIE status or the financial statement effect.
Write the action and who is told: eliminate, safeguard, or decline, then inform TCWG.
Repeat for each issue, one short paragraph each, and finish with an overall recommendation.

Common mistakes in Auditor Independence, Non-Assurance Services and Fees

Saying the IESBA Code has no fixed fee percentage for a PIE, or giving a figure for a non-PIE.
Students mix up the PIE rule with the 'large proportion' test used for non-PIEs.
Fix: For a PIE audit client, state that total fees from the client above 15% of the firm's total fees for two consecutive years must be disclosed to TCWG, with the safeguard communicated. A pre-issuance review applies before the opinion on the second year's financial statements. For later years in which the fees continue to exceed 15%, the firm discloses and applies a pre-issuance or post-issuance review as the Code allows. For non-PIEs, use 'large proportion of total fees' and compare with the firm's size.
Treating all NAS as banned for audit clients.
Students over-learn the PIE restriction.
Fix: Say that some NAS are allowed for non-PIEs with safeguards, but taking management responsibility is never allowed, and PIEs have tighter limits.
Suggesting a safeguard when none can work.
Students feel they must always offer a fix.
Fix: If the firm would be making management decisions or auditing its own significant work, conclude the service must be declined or the engagement withdrawn.
Ignoring independence in appearance.
Students focus on whether the auditor would actually be biased.
Fix: Add one sentence on how a reasonable and informed third party would view the situation.
Forgetting to communicate with TCWG.
Students stop after the safeguard.
Fix: End with who must be informed and what is documented, particularly for PIEs.

Worked examples

Example 1

Alder Co is a listed company audited by your firm. The firm also prepares its monthly management accounts and has been asked to value a significant intangible asset that is material to the financial statements. Discuss the independence threats and recommend action. (6 marks)

Show the solution

Alder is listed, so it is a PIE. The restrictions on NAS are tighter.
Preparing accounting records and financial statements is prohibited for a PIE audit client, except in an emergency. Where the management accounts are the accounting records that feed the financial statements, preparing them creates a self-review threat because the firm would audit figures it produced. If some management accounts are purely internal and do not feed the financial statements, the prohibition applies less directly, but you must still assess the threat and any management responsibility concern.
The valuation of a material intangible is prohibited for a PIE where it has a material effect on the financial statements and involves a significant degree of subjectivity. Here the value is material and, as is typical for an intangible, it is highly subjective, so both conditions are met and a self-review threat arises.
No emergency exception is indicated for either service.
Recommendation: decline the valuation and cease preparing the accounting records that feed the financial statements, unless an emergency exception applies. For any purely internal management accounts, assess the threat and confirm that management takes responsibility.
Raise the matter with the ethics partner and communicate with TCWG, including the audit committee, documenting the conclusion.

Answer: The valuation is prohibited because it is material and highly subjective, and preparing the accounting records that feed the financial statements is also prohibited for a PIE. The firm should decline the valuation, cease the accounting work, and discuss the position with TCWG.

Example 2

Birch Ltd, a non-listed client, accounts for a significant share of your regional office's fees. Birch owes the firm last year's audit fee, and the audit partner suggests delaying the demand for payment until after this year's audit. Evaluate the threats and recommend action. (5 marks)

Show the solution

Fee dependency creates a self-interest threat because the firm may be reluctant to lose the client, and an intimidation threat if Birch could threaten to move.
A significant part of fees for a prior period has remained unpaid. The firm should consider whether these overdue fees might be regarded as equivalent to a loan to the client, which adds to the self-interest threat.
The threat is more significant if the fees are a large proportion of total firm fees or the overdue amount is significant and has been outstanding for a long time.
Actions: discuss the overdue fees with TCWG, consider whether the amount is significant and whether the firm can continue to act, and have a second partner review the audit work. The firm may decide the report cannot be issued until the fees are paid. This is a judgement, not a fixed rule.
Plan to reduce reliance on the client in the longer term. If safeguards are not enough, consider resignation.

Answer: There are self-interest and intimidation threats, and the overdue fees may be equivalent to a loan. The firm should discuss the position with TCWG, assess significance and whether it can continue to act, apply an independent review, and may decide not to issue the report until the fees are paid. It should consider resigning if the threats cannot be reduced.

Exam tips

Name the threat in the first words of each paragraph and tie it to a fact.
Always state whether the client is a PIE. It changes the rule that applies.
Do not stop at the threat. Marks go to the action and to who you communicate with.
For professional skills marks, give a clear recommendation, such as decline or accept with safeguards, instead of listing options.
Use short paragraphs and keep each issue separate so the marker can follow it quickly.

Practice questions from Professional and ethical developments

Auditor Independence, Non-Assurance Services and Fees: frequently asked questions

What is the difference between independence of mind and in appearance?

Independence of mind is your actual state of objectivity. Independence in appearance is how the situation looks to a reasonable and informed third party. You need both.

Can an auditor provide non-assurance services to an audit client?

Often yes for non-PIEs if threats are at an acceptable level. Taking management responsibility is never allowed. For PIEs, services that create a self-review threat are not allowed. Preparing accounting records and financial statements is prohibited except in an emergency. Valuation services are prohibited where the valuation would have a material effect on the financial statements and involves a significant degree of subjectivity.

Is there a fixed percentage limit for fee dependency?

For a PIE audit client, there is a 15% trigger. If total fees (audit and other) from the client exceed 15% of the firm's total fees for two consecutive years, the firm discloses this to TCWG and communicates the safeguard used. A pre-issuance review applies before the opinion on the second year's financial statements. In later years while the dependency continues, the firm discloses and applies a pre-issuance or post-issuance review as the Code allows. For non-PIEs, the Code uses a 'large proportion' test instead.

How do I answer an AAA ethics question?

Identify the threat, link it to the scenario, evaluate it, recommend action, and say who is informed. Finish with a clear conclusion on whether to accept, continue or decline.