Fee Dependence, Prohibited Services and a Gift: Independence Under Pressure

(a) Internal audit - decline. Section 144 prohibits the statutory auditor from rendering internal audit services to the company, its holding company or its subsidiary. The prohibition is absolute for the period of the audit assignment and no safeguard can cure it. Regulator expectations for NBFC internal audit reinforce independence from the statutory auditor. Decline in writing, and let the audit committee appoint an unrelated firm.

(b) Contingent-fee comfort - decline in this form. A fee payable only if the transaction closes is a contingent fee on an assurance or advisory engagement. For assurance work the self-interest threat cannot be reduced to an acceptable level by any safeguard, because the auditor's objectivity is compromised when the outcome determines the fee. If the comfort involves structuring or investment-banking-type advice on the securitisation, section 144 bars it outright. A fixed fee for a permitted assurance report, pre-approved by the audit committee, is acceptable.

(c) Tax representation - permitted, with safeguards. Tax representation is not in the section 144 list, and the Code permits tax services that are not managerial and do not involve assuming management responsibility. But the ₹7 crore demand will probably drive a provision in the financial statements which the same firm audits, so: use a team completely separate from the audit engagement team; do not make decisions on the client's behalf or sign submissions as the client; obtain audit committee approval; and document the self-review threat and the safeguards. Drafting submissions jointly with the CFO sits close to the line between assisting and advocating a position the firm will later have to audit.

Fee dependence. 18% of firm revenue from one client group, for two consecutive years, is a large proportion. The Code sets no fixed percentage, but for an audit client that is a public interest entity the firm must evaluate the self-interest threat, disclose the total fees to those charged with governance and apply safeguards: an engagement quality review, disclosure and periodic reassessment, and reliance on monitoring and external inspection. Telling the audit committee once in 2024 is stale - re-disclose annually, minute its view, and if the threat cannot be reduced, reconsider whether the relationship can continue.

Gift. A ₹45,000 watch is not trivial and inconsequential. Accepting it creates self-interest and familiarity threats. The firm should have a gifts and hospitality policy with a nominal threshold and a register; the watch must be returned (or paid for at cost), the incident recorded, and it reported to the ethics partner. Failure to do so is itself a matter for the firm's monitoring and possibly for the disciplinary process.

Internship. The daughter is an immediate family member of an audit team member. A role in the client's accounts department creates familiarity and self-interest threats. An intern is unlikely to 'significantly influence' the financial statements, so the Code's strict bar may not be triggered, but the appearance of a benefit flowing from the audit client to the engagement partner is serious, particularly combined with the gift and the fee dependence. Best practice: she declines, or takes a role outside finance, and the matter is documented; if she proceeds, the partner should be removed from the engagement and the audit committee informed.

Now. Convene the firm's ethics/independence review, document each threat and safeguard, and report the outcome to the audit committee.

Not acceptable. The nature, timing and extent of audit procedures are determined by risk, materiality and the evidence needed - not by the fee. Reducing substantive testing to protect margin would mean the file does not support the opinion, breaching professional competence and due care, and it would not survive inspection by the regulator. The partner's proposal also reveals a self-interest threat to objectivity created by the fee arrangement itself.

Correct response.

1. Design the audit to the risk (a 214-branch NBFC-MFI with a ₹3,400 crore-type loan book warrants significant testing of origination, classification and provisioning), then cost that programme.
2. Take the cost to the audit committee: fees have not moved since 2024 while the client has grown, so the fee is uneconomic as scoped. Renegotiate, or agree a reduced but risk-justified scope in writing.
3. If the client will not pay for a proper audit, the firm must either absorb the cost or resign, following the section 140 procedure and filing the statement in Form ADT-3.
4. At firm level, treat the fee concentration as a quality-management and commercial risk, and consider whether the client portfolio needs rebalancing.

Documentation. Record the scoping decision, the resourcing, the fee discussion and the audit committee's response - a reviewer must be able to see that scope drove the fee and not the reverse.