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

Wexcombe LLP audits Tarn Ltd, a non-PIE. Fees for the audit are agreed at a base amount, with an additional amount payable only if Tarn obtains a bank loan, after the auditor issues a clean audit opinion that the bank relies on. How does the IESBA Code view this fee arrangement?

The arrangement is not permitted. The IESBA Code prohibits contingent fees for audit engagements, because the extra payment depends on the outcome and creates a self-interest threat that no safeguards such as disclosure or representations can reduce to an acceptable level, whether or not the client is listed.

  1. AIt is acceptable because contingent fees are permitted whenever the client is not listed
  2. BIt is acceptable if the fee is disclosed to the bank in the audit report
  3. CIt is acceptable provided the firm obtains a management representation on the arrangement
  4. DIt is not permitted, because a contingent fee for an audit engagement creates a self-interest threat that no safeguard can reduce to an acceptable levelCorrect

Explanation

The Code prohibits contingent fees for audit engagements because the fee depends on the outcome of the work, creating a self-interest threat that cannot be mitigated by safeguards. Whether the client is listed is irrelevant to this prohibition. Disclosure to the bank or a management representation does not remove the threat.

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