Advanced Audit and Assurance (International) · Professional appointments

Audit Tendering and Fees: Ethics and Exam Technique

Updated 11 October 2026

Audit tendering is how a firm competes for audit work. Fees must be set so that quality and independence are not harmed. Low pricing, contingent fees and heavy reliance on one client create threats under the IESBA Code. To solve a question, identify the threat, explain why, then propose safeguards or decline.

Understand Audit Tendering and Fees

A tender is a firm's proposal to win an audit. The client may run a formal process, often to meet governance rules or to cut costs. The firm decides whether to bid, prices the work and presents its approach. Every step has ethical and commercial risks.

Before bidding, the firm should do its client acceptance checks. It looks at the client's integrity, its own competence and resources, and any independence or conflict-of-interest issues. A firm that is not independent should not bid. It must also be able to staff the audit with suitably skilled people.

Lowballing means quoting a fee well below the market level, often to win the client and then recover the loss through other services or later fee increases. The danger is not the low fee itself. Under the IESBA Code, a low fee creates a self-interest threat to professional competence and due care. The firm must still apply the ISAs and do the work needed. It must show that it has the time, skills and staff to do so. Low fees are acceptable only if quality is not reduced.

Contingent fees depend on a result or outcome. For audit and other assurance engagements, a fee that is contingent on the result of the work is prohibited. For non-assurance services to audit clients, a contingent fee is prohibited where the amount is material, or where the outcome depends on a current or future audit judgement. For other non-assurance services, a contingent fee is not automatically banned. The firm evaluates the threats and applies safeguards, and declines if they cannot be reduced to an acceptable level.

Fee dependence arises when fees from one client are a large proportion of the firm's total fees. The firm may fear losing the client and so give in to pressure. This is a self-interest (and intimidation) threat. The Code treats public interest entities and other audit clients differently.

For a public interest entity, the Code has a specific test. If total fees from the client are more than 15% of the firm's total fees for two consecutive years, the firm must disclose this to those charged with governance and apply a review (pre-issuance or post-issuance) of the second year's audit by a professional accountant who is not a member of the firm. The firm keeps doing this in later years while the share stays above 15%.
For an audit client that is not a public interest entity, there is no fixed 15% trigger. The firm evaluates how significant the self-interest and intimidation threats are when fees from the client are a large proportion of its total fees. If the threat is significant, the firm applies safeguards, such as a pre-issuance or post-issuance review by a professional accountant who is not a member of the firm, or reducing dependence on the client. If the threat cannot be reduced to an acceptable level, the firm declines or withdraws. Disclosure to those charged with governance is good practice.

In every case, the firm also considers other safeguards, such as reducing dependence on the client. The firm should also watch overdue fees, which can resemble a loan from the firm to the client.

Key rules to remember

Fee dependence test: Fees from one client ÷ total fees of the firm (or office or partner) × 100; Use it to show how significant the client is. The 15% two-consecutive-year test applies to public interest entities only. If it is met, disclose to those charged with governance and apply a pre- or post-issuance review by an external professional accountant. For other audit clients there is no fixed 15% trigger. Evaluate how significant the threat is from a large share of fees and apply safeguards such as an external review.
Fee level rule: Low fee is acceptable only if quality, ISAs and ethical standards are still met; Firm must show it has time, skills and staff for the work.
Contingent fee on audits: Audit or assurance fee contingent on the result of the work = prohibited; For non-assurance services to audit clients, prohibited if material or dependent on an audit judgement. Otherwise evaluate the threats.
Threat response: Identify threat → assess level → apply safeguards → if not acceptable, decline or withdraw; This is the Conceptual Framework approach.

How to solve Audit Tendering and Fees questions

Use the same pattern for any question on tendering, pricing or fees. Link each point to the scenario facts.

1Read the scenario and note the facts: fee level, how fees are set, size of the client to the firm, and any pressure.
2Name the issue: lowballing, contingent fee, fee dependence, overdue fees or non-audit fee linkage.
3State the threat type (self-interest, intimidation, familiarity, advocacy) and the principle at risk.
4Explain why it is a threat using the numbers or facts given, for example the client's share of total fees.
5Say whether the arrangement is prohibited or can be managed. Contingent fees on audit and other assurance work are prohibited. For non-assurance services to audit clients, they are prohibited if material or dependent on an audit judgement, and otherwise need threat evaluation.
6Propose safeguards that fit: independent review, extra staffing, disclosure to those charged with governance, fee review or declining.
7Give a clear conclusion: accept, accept with safeguards, or decline. Add the ISQM and acceptance angle if relevant.
8Finish with professional skills: a balanced, commercial and sceptical view.

Quickest way: Issue, threat, safeguard, decision

When to use it: Use it when time is short or marks per point are low.

Write the issue in a few words.
Write the threat and the principle at risk.
Add one fact from the scenario as evidence.
Give one or two practical safeguards.
State your decision in one sentence.

Common mistakes in Audit Tendering and Fees

Saying a low fee is always unethical.
Students link lowballing with bad practice automatically.
Fix: Say the fee is acceptable if quality is maintained. The threat is to due care and competence, so show how the firm will resource the work.
Treating contingent fees as manageable with safeguards on audits.
Students apply the general safeguard approach to every threat.
Fix: State that contingent fees for audit and other assurance work are prohibited. Safeguards cannot fix them. For non-assurance services to audit clients, say they are prohibited if material or dependent on an audit judgement, and otherwise evaluate the threats.
Applying the 15% two-year fee-dependence test to every audit client.
Students remember the 15% figure but forget that it belongs to public interest entities only.
Fix: Calculate the client's share from the figures given. For a public interest entity above 15% for two consecutive years, disclose to those charged with governance and apply a pre- or post-issuance review by an external professional accountant. For any other audit client, there is no fixed 15% trigger. Evaluate how significant the threat is from a large share of fees and apply safeguards such as an external review or reducing dependence.
Listing threats without linking them to the scenario.
Students rely on memorised lists.
Fix: Quote the facts, such as a client making up a large share of income, and explain the effect.
Ignoring practical tender issues such as staffing, independence checks and contact with the outgoing auditor.
Students focus only on fees.
Fix: Cover acceptance steps: independence, competence, resources and professional clearance with the existing auditor.
Giving safeguards that are unrealistic, such as 'tell the client' as the only step.
Students use generic wording.
Fix: Pick safeguards that really reduce the threat, such as an independent review, reallocating staff or declining the work.

Worked examples

Example 1

Pembroke & Co is tendering for the audit of Kestrel Ltd, a listed manufacturer. The partner proposes a fee 40% below last year's fee to win the client, intending to sell tax and consulting services later. Discuss the ethical issues and advise on how the firm should proceed. (8 marks style)

Show the solution

Issue: the proposed fee is far below the market level, which is lowballing. Kestrel is listed, so the public interest in audit quality is high.
Threat: self-interest. The firm may cut audit work to protect margins. This threatens professional competence and due care.
Added concern: the plan to recover the loss through other services may create threats to independence from non-audit services and a stronger interest in keeping the client.
A low fee is not prohibited in itself. The firm must still meet the ISAs, so it must show it can do so.
Safeguards: confirm that the audit team has enough hours and skilled staff, set the budget on the basis of the required audit work, and have an independent partner review the proposal and the fee basis.
Safeguards: assess any proposed non-audit services separately, and do not link them to the audit fee.
Conclusion: bid only if the firm can show that quality is protected at the proposed fee. If it cannot, increase the fee to a level that funds the required work, or decline to bid.

Answer: The 40% discount is lowballing and creates a self-interest threat to due care and competence. It is allowed only if the firm can still perform a full ISA-compliant audit. The firm should check resources, have the fee reviewed by an independent partner and separate any non-audit services. If quality cannot be assured at the proposed fee, it should increase the fee or decline to bid.

Example 2

Harlow LLP audits Beacon plc, a private company. The firm's total annual fees are $4,000,000. Beacon pays $1,200,000 a year, and a further $150,000 is overdue from last year. Beacon's finance director suggests Harlow's audit fee could include a bonus if the company obtains a bank loan using the audited accounts. Evaluate the issues.

Show the solution

Fee dependence: $1,200,000 ÷ $4,000,000 = 0.30, which is 30% of total fees.
Beacon is a private company, not a public interest entity, so the Code's formal 15% two-consecutive-year test does not apply. There is no fixed trigger for Beacon. Instead, Harlow must evaluate the threat. A 30% share is a large proportion of the firm's fees. It creates a significant self-interest threat, and an intimidation threat if the client pressures the firm.
Safeguards: apply a pre-issuance or post-issuance review of the audit by a professional accountant who is not a member of the firm, and take steps to reduce dependence on this client. Disclosure to those charged with governance is not required for a non-public interest entity, but it is good practice.
Overdue fees: $150,000 from last year may act like a loan from the firm to the client. The firm may be reluctant to qualify the opinion or lose the client, which threatens objectivity.
Contingent fee: the bonus depends on an outcome, the bank loan being obtained using the audited accounts. The outcome is linked to the audit report and the audit opinion. A fee contingent on this outcome is prohibited for an audit engagement.
Response: reject the contingent element and keep the audit fee fixed or based on time and risk.
Overdue fees: agree a payment plan and resolve the debt before the current audit is signed, or consider whether the firm can continue.

Answer: Beacon makes up 30% of total fees. As Beacon is not a public interest entity, the formal 15% two-year test does not apply. Harlow must still evaluate the significant self-interest and intimidation threats from this large share of fees. Safeguards include an external pre- or post-issuance review and reducing dependence on Beacon. Disclosure to those charged with governance is good practice. The overdue $150,000 adds to the threat. The bonus depends on the bank loan outcome, which is linked to the audit report and opinion, so it is a contingent fee that is prohibited for an audit engagement and the firm must refuse it. The firm should also collect the overdue fees.

Exam tips

Always link each threat to a fact from the scenario. Generic lists score poorly.
Say clearly when something is prohibited, such as contingent fees on audits, rather than offering safeguards.
Calculate fee dependence as a percentage when numbers are given, then comment on it.
End each requirement with a decision: accept, accept with safeguards, or decline.
Use the professional skills marks by writing balanced and commercial advice, not only the ethics rule.

Practice questions from Professional appointments

Audit Tendering and Fees: frequently asked questions

Is lowballing banned for auditors?

No. A low fee is not forbidden by itself. It is a threat to due care and competence, so the firm must show that it can still do the audit properly with enough time and skilled staff.

Can an audit firm charge a contingent fee?

Not for an audit or other assurance work. A fee that depends on the outcome of the work destroys objectivity, and safeguards cannot make it acceptable. For non-assurance services to an audit client, a contingent fee is prohibited if it is material or depends on a current or future audit judgement. Otherwise the firm evaluates the threats and applies safeguards.

What is fee dependence and how do I deal with it in the exam?

It is when one client provides a large share of the firm's total fees. Work out the percentage from the figures and explain the self-interest and intimidation threats. The Code's 15% two-consecutive-year test is for public interest entities only. For those, disclose to those charged with governance and apply a pre- or post-issuance review by an external professional accountant. For other audit clients, there is no fixed 15% figure. Evaluate how significant the threat is and apply safeguards such as an external review or reducing reliance on the client.

Why do overdue fees matter for independence?

Large unpaid fees can look like a loan from the firm to the client. The firm may then hesitate to issue a modified opinion. Ask the client to settle the debt before the audit report is signed.