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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional appointments

Preston & Co is negotiating an audit engagement with Kestrel Ltd. The finance director proposes that the audit fee will be 0.5% of any bank loan that Kestrel obtains, with the audit opinion expected to support the loan application. What is the correct view?

The arrangement is not acceptable. A fee that depends on whether the client obtains a loan is a contingent fee, and for an audit engagement the resulting self-interest threat is so significant that no safeguards can reduce it to an acceptable level. Disclosure or review does not cure it.

  1. AAcceptable, because the fee is linked to client success and so aligns incentives
  2. BAcceptable if the fee is disclosed in the financial statements
  3. CAcceptable if an engagement quality reviewer is appointed
  4. DNot acceptable, because a contingent fee for an audit engagement creates a self-interest threat so significant that no safeguards could reduce it to an acceptable levelCorrect

Explanation

The Code prohibits contingent fees for audit engagements because the fee depends on the outcome, creating a self-interest threat that cannot be reduced by safeguards. Disclosure or a quality reviewer does not remove the threat.

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