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

Quill Audit is invited to tender for Norland Tech. The directors propose that Quill's audit fee be a percentage of Norland's reported profit before tax. Quill also provides Norland with valuation advice, and the fee for that service would be contingent on the valuation exceeding a target. Which statement is correct under the IESBA Code?

Both arrangements are unacceptable. Audit fees must not be contingent on results, and a contingent fee for a valuation service is prohibited when the valuation is material to the financial statements and highly subjective, because the self-interest threat cannot be reduced to an acceptable level.

  1. ABoth fee arrangements are acceptable if disclosed to shareholders
  2. BA contingent fee for the audit is prohibited, and a contingent fee for the valuation service is also prohibited where the valuation is material to the financial statements and involves significant subjectivityCorrect
  3. COnly the audit fee is a problem; the valuation contingent fee is always permitted
  4. DBoth are permitted if a second partner reviews the work

Explanation

Contingent fees for an audit engagement are not permitted. For a non-assurance service to an audit client, a contingent fee is prohibited where the outcome is material to the financial statements and the threat cannot be reduced to an acceptable level, such as a significantly subjective valuation. Review by another partner would not remove the threat in either case.

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