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

Orrin & Partners agreed with a private-company audit client that the audit fee would be 'a percentage of the profit before tax reported in the audited financial statements'. Which assessment is correct under the IESBA Code?

A fee linked to the profit shown in the audited financial statements is a contingent fee. The IESBA Code does not permit contingent fees for audit engagements, since the threat to objectivity cannot be reduced to an acceptable level by any safeguards, whatever the percentage or approvals.

  1. AAcceptable, because it is a normal commercial pricing method for audits
  2. BAcceptable if the percentage is below 5%
  3. CNot acceptable for an audit, because a contingent fee for an audit engagement creates self-interest and advocacy threats so significant that no safeguards could reduce them to an acceptable levelCorrect
  4. DAcceptable provided the client's audit committee approves the arrangement

Explanation

The Code prohibits contingent fees for audit engagements because the fee depends on the outcome, here the reported profit. This creates a self-interest threat to objectivity that no safeguard can address. Neither a low percentage nor audit committee approval changes this.

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