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

Orchid Plc, a listed company, is audited by Faro LLP. Faro proposes a tax advisory engagement for Orchid with a fee that depends on the amount of tax saved, and the outcome would materially affect the financial statements. Which statement is correct under the IESBA Code?

A contingent fee is not permitted. The IESBA Code prohibits contingent fees for non-assurance services to audit clients when the outcome materially affects the financial statements, because the self-interest threat cannot be reduced to an acceptable level by using a separate team or by disclosure.

  1. AA contingent fee is acceptable if the engagement is performed by a team separate from the audit team
  2. BA contingent fee is acceptable if disclosed in the audit report
  3. CA contingent fee is acceptable only if the tax saving is below materiality
  4. DA contingent fee for a non-assurance service to an audit client is not permitted where the outcome is material to the financial statementsCorrect

Explanation

The Code prohibits contingent fees for a non-assurance service to an audit client where the fee is material to the firm or the outcome of the service, and its dependence on future events, would materially affect the financial statements being audited. Here the outcome is material, so no safeguard such as a separate team or disclosure resolves it. The materiality condition is on the outcome being material, not below materiality.

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