An auditor’s report is only as good as the auditor’s independence. A report from someone who owns shares in the client, owes the client money or depends on the client for half the firm’s income would be worth little, even if every figure had been checked.
The International Ethics Standards Board for Accountants (IESBA) Code therefore gives guidance on the situations that threaten independence and on the response to each one.
This topic covers what independence means, the five general threats, and the specific rules on financial interests, loans, business ties, family and personal links, employment, long association, fees, gifts and litigation. Examiners test these through scenarios: they give a set of facts and ask which threats arise and what the firm should do. They also test the numbers: seven years, five, three and two years, 15% and 25%.
In 30 seconds
An auditor must be independent in mind and in appearance. The Code names five threats: self-interest, self-review, advocacy, intimidation and familiarity. Assurance team members may not hold a direct financial interest or a material indirect one in a client. Loans to or from a client, other than a normal bank loan to a bank client, are to be avoided, and so are close business relationships such as joint ventures.
A close family member in a position of influence at the client means removing the team member. For public interest entities a key audit partner rotates after seven years, with cooling-off of five years for the engagement partner, three for the quality reviewer and two for others.
If one client’s fees exceed 15% of the practice’s fee income for two years, the firm discloses to those charged with governance and arranges a review. Institute of Chartered Accountants of Nigeria (ICAN) uses 25%. Gifts must be trivial and inconsequential. Litigation with the client may leave resignation as the only answer.
What independence means
To be of value, the auditor’s opinion must come from someone who is independent and who is seen to be independent. The opinion must not be influenced by anyone else, above all by the management whose financial statements are being audited. Independence is a matter of public confidence in the audit process.
- Independence of mind is a state of mind that lets the auditor reach a conclusion without being affected by influences that compromise professional judgement. It allows integrity, objectivity and professional scepticism.
- Independence in appearance means avoiding facts and circumstances so significant that a reasonable and informed third party would probably conclude that the integrity, objectivity or scepticism of the firm or a team member had been compromised. An auditor who owns shares in the client would be seen as unwilling to see the investment lose value.
The working presumption is that an auditor who is not independent in appearance cannot be objective. This may not be true in every case, but it must be held to protect the reputation of auditors. The Code gives guidance rather than fixed rules, and leaves it to each member to apply judgement. Auditors must watch for threats, and the firm can reduce them by safeguards.
The five general threats
| Threat | Meaning | Examples |
|---|---|---|
| Self-interest | The firm or accountant has a financial or other interest that may colour decisions | Owning shares in a client; accepting goods, services or hospitality that are not trivial |
| Self-review | The accountant must re-evaluate a judgement or action he made earlier | The firm prepares the financial statements and then audits them |
| Advocacy | The accountant is expected to defend the client’s position | Defending the client in court on material matters; promoting or underwriting a client’s share issue |
| Intimidation | The accountant is deterred from acting objectively by threats | The client threatens to take work away unless the firm agrees |
| Familiarity | The accountant becomes too sympathetic to the client through close relationships | Long association; a family or personal link with someone who influences the statements; staff moving between firm and client |
Financial interests, loans and business relationships
Financial interests
A financial interest in a client may create a self-interest threat. The level of risk depends on the holder’s role, the size of the interest and how much control the holder has over it. The guidance says that a member of the assurance team, or an immediate family member of one, must not hold a direct financial interest or a material indirect interest in a client. The interest must be disposed of, or the team member removed.
Loans and guarantees
A loan from a client that is a bank or similar institution, made on normal commercial terms, is not a threat. Other loans or guarantees to or by an assurance client create a self-interest threat and must be avoided.
Close business relationships
Close business relationships, such as a material joint venture, create a self-interest or intimidation threat and must be avoided. Buying goods and services from the client at arm’s length in the normal course of business is generally acceptable.
Example. A client developing a new product invites its audit firm to invest, either in convertible debentures or in a joint venture company. Buying debentures is a form of loan, a major self-interest threat with no suitable safeguard, and conversion to shares would add another. A joint venture would give the two parties significant mutual financial interests.
A financial interest in an audit client is allowed only if it is not material, the relationship with the client is insignificant and the firm has no significant influence. None of these is true here. If the firm resigned the audit, it could invest, because the threats would no longer exist.
Commercial transactions with a team member
The Code does not ban commercial transactions between an audit client and a team member if they are in the normal course of the client’s business, at arm’s length (normal commercial terms), and not material to either party. Example. An audit manager gets 50% off garaging and track fees at a client’s motor circuit because of his job.
This is not at arm’s length, and the saving is likely to be material to him. It is a self-interest threat and perhaps a familiarity threat. The ethics partner should be consulted, the manager removed from the team, those charged with governance told, and the audit plan reviewed. The ethics partner may also check whether he has similar deals with other clients.
Family, employment and recent service
- Family and personal relationships. These can cause self-interest, familiarity or intimidation threats. Each case is judged on the role of the team member and the closeness of the link. When an immediate family member of a team member is a director, officer or employee who can exert significant influence over the subject matter, the threat is great and can be avoided only by removing the individual from the team.
- Employment with the client. A director or senior employee of the client who recently worked for the firm may threaten independence. Safeguards, such as an independent review of the audit file, may reduce the threat. For a public interest entity, if a former key audit partner joins the client, independence is treated as compromised unless, after he ceased to be a key audit partner, the entity issued audited financial statements covering at least twelve months and he was not on the audit team for them. A team member who has applied for a job at the client faces a self-interest threat. The firm needs a policy that requires disclosure of employment negotiations, removal from the team and review of the person’s significant judgements.
- Recent service with the client. Someone who served as a director or officer of the client in the period under review must not be assigned to the assurance team. In other cases, safeguards may be enough.
- Serving as officer or director. Assurance providers must not serve as an officer or director of an assurance client. Routine administrative help, such as company secretary work, may be appropriate if no management decisions are made.
Long association and rotation
Using the same senior staff on an assurance engagement for a long time creates a familiarity threat. The firm should consider the person’s role and the length of service. Safeguards include rotating senior staff such as the engagement partner, an additional professional accountant to review the work, and independent quality control reviews.
For public interest entities, the Code says a key audit partner (the engagement partner, the quality review partner or an engagement partner of a significant component) must be rotated after no more than seven years. The cooling-off period, before the person can return, is:
| Role | Cooling-off period |
|---|---|
| Engagement partner | Five consecutive years |
| Engagement quality control reviewer | Three consecutive years |
| Key audit partner in any other capacity | Two consecutive years |
When an audit client becomes listed, the time the individual has already served as a key audit partner counts. The remaining time is seven years minus time already served.
The Nigerian Financial Reporting Council of Nigeria (FRC) Audit Regulation 2020, covered earlier, expects the engagement partner to rotate after five years, and requires firm rotation after ten continuous years (fifteen for a joint audit) with a seven-year cooling-off period. For a Nigerian public interest entity, apply the stricter FRC rule and mention the IESBA seven-year limit as the international benchmark.
Fees, gifts and litigation
Fee dependence
If one client’s fees are a large part of the firm’s total fees, there is a significant self-interest or intimidation threat. It depends on the structure of the firm and whether it is established or new.
Under the IESBA Code, for public interest entities, when recurring fees from one client or related group exceed 15% of the total fee income of the audit practice for two consecutive years, the firm must disclose that to those charged with governance and have a review done by an external professional accountant or a regulatory body.
If the share is well above 15%, a pre-issuance review is likely to be needed rather than a post-issuance review. The ICAN code uses a higher threshold of 25%.
- A pre-issuance review is a review of the audit work by someone who is not on the audit team, typically another partner, before the report is issued. A post-issuance review is done after it is issued.
- Disclosure alone is not a full safeguard. It informs those charged with governance but does not remove the financial incentive or the pressure on the team, which is why a review is also required.
- In a larger firm, a single office may be over the threshold even if the firm is not. Responsibility for signing off the file should then move to a different office.
- Overdue fees from an assurance client may become a loan to the client and should be avoided.
Inducements, gifts and hospitality
Team members and firms must not accept inducements, such as goods or hospitality, from an assurance client unless the value is trivial and inconsequential to all parties.
When a team accepts something, the firm should look at:
- whether the value is large enough to affect objectivity
- whether hospitality was taken in normal working hours, which raises questions about conduct and supervision and so about quality control
- whether the person checked first with a senior person, because if not there may be a disciplinary matter
Actual or threatened litigation
Litigation, or a threat of it, between the client and the firm may cause self-interest or intimidation threats. Safeguards may apply, but resignation may be the only suitable response, particularly where litigation has begun.
The rules in more depth
Why disclosure is not a safeguard on its own
Telling the board of directors that one client provides a large share of income tells them about the risk. It does nothing to the auditor’s own incentive. The partner still knows that losing the client would hurt the firm. A review by someone outside the team puts a second, independent judgement between the incentive and the opinion, and a pre-issuance review does so before the report is signed.
Why the rules differ for public interest entities
Public interest entities have many investors and the public relying on the audit, so the Code sets tighter limits: seven-year rotation with cooling-off, the 12-month rule for former key audit partners, and tougher rules on services. The same facts may be acceptable for a small private client.
Numbers: fee dependence
A firm has fee income of ₦480 million. One public interest entity pays ₦96 million in each of two successive years. The share is ₦96 million ÷ ₦480 million = 20%. That is over the IESBA 15% threshold, so the firm must disclose to those charged with governance and arrange a review. It is below ICAN’s 25% threshold. A prudent firm would still follow the stricter IESBA safeguards.
If the share were 30% it would exceed both, and a pre-issuance review would be expected.
Numbers: partner rotation
A key audit partner who has served a client for 4 years before it lists on the stock exchange has 7 − 4 = 3 years left before rotation under the Code. Under the FRC expectation of five years for an engagement partner, 5 − 4 = 1 year would remain.
Worked example: a long-standing listed audit
Scenario. Bello and Partners has audited Eko Brewers Plc, a listed company, for ten continuous years. The engagement partner, Mrs Bello, has led the audit for six of them. In each of the last two years, Eko has paid fees equal to ₦96 million, on total practice fee income of ₦480 million. This year, Eko’s finance director invited the audit team to a weekend at a resort, at Eko’s cost.
A senior audit assistant has applied for a job in Eko’s finance department. Evaluate the threats and say what the firm should do.
- Firm rotation. The FRC Audit Regulation requires rotation after ten continuous years. Bello and Partners has reached ten years, so it must rotate and cannot return for seven years. Long association is a familiarity threat.
- Partner rotation. Mrs Bello has served six years. The Code allows seven years for a key audit partner, so she is within it. But the FRC expectation of five years for the engagement partner has been exceeded, so she should rotate now. A cooling-off of five consecutive years applies before she can return.
- Fees.
₦96 million ÷ ₦480 million = 20%, over 15% for two consecutive years.
The firm must disclose to those charged with governance and arrange an external review, preferably before the report is issued.
It is below ICAN’s 25%, but the IESBA safeguards still apply to a public interest entity.
This is a self-interest and intimidation threat. - The weekend. A weekend at the client’s cost is not trivial and inconsequential. It is a self-interest threat and risks the perception that the team is too close to the client. The invitation must be declined and reported to the ethics partner.
- The job application. A team member seeking employment at the client has a self-interest threat. Under the firm’s policy she should disclose it, be removed from the team, and her significant judgements should be reviewed.
- Conclusion. Rotate the firm and partner as required, disclose and review the fee dependence, refuse the hospitality, and remove and review the assistant’s work.
How to score full marks
- For each fact, give the threat, the rule and the safeguard. “A weekend at the client’s cost is a self-interest threat. Gifts must be trivial and inconsequential. Decline and report.”
- Use the five threat names exactly. Self-interest, self-review, advocacy, intimidation and familiarity.
- Quote the numbers with their source. Seven years and cooling-off of five, three and two (IESBA); five years for the engagement partner and ten for the firm (FRC); 15% (IESBA) and 25% (ICAN).
- For fees, say why disclosure alone is not enough. It informs but does not remove the incentive. That is worth a mark.
- For rotation questions, give reason, methods, rules and a balanced view. Familiarity threat, partner versus firm rotation, the Nigerian rules, and the cost of transition.
- Remember the public interest entity rules. Say whether the client is one, because the answer changes.
- Time. Spend time in proportion to marks and work through the facts in the order given.
Common mistakes in the exam
- Mixing the IESBA 15% threshold with ICAN’s 25%.
- Quoting a single cooling-off period for all key audit partners. It is five, three or two years by role.
- Saying disclosure to the board fully solves fee dependence.
- Forgetting that a normal commercial bank loan from a bank client is allowed.
- Treating a joint venture with a client as a safeguardable risk. It must be avoided.
- Ignoring the 12-month rule for a former key audit partner joining a public interest entity client.
- Confusing self-review with self-interest.
- Not stating whether hospitality is trivial and inconsequential.
Quick revision
- Independence of mind and in appearance. Five threats: self-interest, self-review, advocacy, intimidation, familiarity.
- Financial interests: none direct or material indirect. Loans: avoid, except normal bank loans from a bank client. Joint ventures: avoid.
- Family in a position of influence: remove the team member. Former key audit partner joining a public interest entity: 12-month rule.
- Key audit partner: seven years. Cooling-off: five, three, two. FRC: engagement partner five years, firm ten (joint fifteen), cooling-off seven.
- Fees: 15% for two years (IESBA), 25% (ICAN). Disclose and review; pre-issuance review if well above.
- Gifts: trivial and inconsequential only. Litigation: possibly resign.
Practice questions
These are original questions written in the style of the ICAN exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. A team member who owns shares in a client creates mainly a:
- Self-interest threat
- Self-review threat
- Advocacy threat
- Familiarity threat
Show the answer
A. The member may want the client’s profits to be high.
Question 2. A firm that prepares a client’s financial statements and then audits them faces a:
- Self-interest threat
- Self-review threat
- Intimidation threat
- Familiarity threat
Show the answer
B. It would be reviewing its own work.
Question 3. A key audit partner of a public interest entity must be rotated after no more than:
- Three years
- Five years
- Seven years
- Ten years
Show the answer
C. Seven years under the IESBA Code.
Question 4. The cooling-off period for an engagement partner is:
- Two consecutive years
- Three consecutive years
- Five consecutive years
- Seven consecutive years
Show the answer
C. Quality reviewers have three years and other key audit partners two.
Question 5. Under the IESBA Code, fees from one public interest entity client that exceed which share of the practice’s income for two consecutive years trigger disclosure and review?
- 5%
- 10%
- 15%
- 25%
Show the answer
C. 15%. ICAN uses 25%.
Question 6. A review of audit work by a person outside the team before the report is issued is called:
- A post-issuance review
- A pre-issuance review
- A peer review
- An engagement letter
Show the answer
B. It is more likely to be needed when the share is well above 15%.
Question 7. A loan from a bank client on normal commercial terms is:
- Always prohibited
- Not a threat to independence
- An advocacy threat
- A disciplinary offence
Show the answer
B. Other loans and guarantees with a client are to be avoided.
Question 8. Inducements from an assurance client may be accepted only if their value is:
- Below ₦50,000
- Trivial and inconsequential
- Approved by the client
- Declared after receipt
Show the answer
B. The test is value to all parties.
Question 9. A close family member of a team member holds a position of significant influence at the client. The threat can be avoided only by:
- Disclosure to the client
- Removing the team member from the team
- An annual review
- Reducing fees
Show the answer
B. The threat is great.
Question 10. If a client sues the firm over a past audit, the safeguard most likely to be needed is:
- A gift policy
- Resignation from the engagement
- A cooling-off period
- A new engagement letter
Show the answer
B. Resignation may be the only suitable response where litigation is actual.
Written questions
Question 11 (10 marks). Explain the meaning of independence of mind and independence in appearance, and describe the five general threats to independence with an example of each.
Question 12 (20 marks). (a) Explain how fee dependence threatens independence and the safeguards in the IESBA and ICAN codes. (8 marks) (b) Evaluate the requirements for rotation of key audit partners of public interest entities, including cooling-off periods. (6 marks) (c) Explain the ethical issues when an audit team accepts gifts and hospitality from a client. (6 marks)
Question 13 (10 marks). Dike and Co audits Rapid Telecom Plc, a public interest entity. Rapid pays Dike and Co ₦150 million a year, which is 30% of the firm’s fee income and has been so for three years. The engagement partner has served eight years. The firm has lent ₦25 million to Rapid’s subsidiary, and an audit manager has a 50% discount on Rapid’s services because of his role. Evaluate the threats and recommend the response to each. (10 marks)
Model answers
Show the model answer to Question 11
Meanings. Independence of mind is a state of mind that allows a conclusion to be expressed without being affected by influences that compromise judgement, so that the auditor acts with integrity, objectivity and scepticism. (2) Independence in appearance means avoiding facts and circumstances so significant that a reasonable and informed third party would conclude that integrity, objectivity or scepticism had been compromised. (2)
Threats. Self-interest: a financial or other interest, such as owning client shares. (1.2) Self-review: re-evaluating own earlier judgement, such as auditing financial statements the firm prepared. (1.2) Advocacy: defending the client, such as underwriting its share issue. (1.2) Intimidation: being deterred by threats, such as the client threatening to withdraw work. (1.2) Familiarity: being too sympathetic through close ties, such as long association. (1.2)
Show the model answer to Question 12
(a) Fee dependence (8 marks). Where one client provides a large share of fees, there is a significant self-interest or intimidation threat, depending on the firm’s structure and whether it is established or new (2).
Under the IESBA Code, for public interest entities, recurring fees over 15% of the practice’s fee income for two consecutive years require disclosure to those charged with governance and a review by an external professional accountant or regulator (2). If the share is well above 15%, a pre-issuance review is likely, as opposed to a post-issuance review (1). ICAN’s threshold is higher, at 25% (1).
Disclosure alone is not enough, because it does not remove the incentive or the pressure on the team (1). For an office that is over the threshold, sign-off should be passed to a different office (0.5), and overdue fees should be avoided as they may become a loan (0.5).
(b) Rotation (6 marks). A key audit partner (engagement partner, quality review partner or engagement partner of a significant component) must be rotated after no more than seven years (2). The cooling-off periods are five consecutive years for the engagement partner, three for the engagement quality control reviewer and two for other key audit partners (2).
When a client becomes listed, time already served counts, so the remaining time is seven years minus the time served (1). In Nigeria the FRC Audit Regulation is stricter, expecting engagement partner rotation after five years (1).
(c) Gifts and hospitality (6 marks). Inducements may be accepted only if trivial and inconsequential (1.5). Self-interest threat arises, so materiality of the value must be assessed (1.5). Hospitality taken in normal working hours raises questions about conduct and supervision, and so about quality control (1.5). If the person did not check first with a senior, there may be a disciplinary matter (1.5).
Show the model answer to Question 13
Fees (2.5 marks). 30% is over the IESBA 15% and ICAN 25% thresholds for three years. This is a self-interest and intimidation threat. The firm must disclose to those charged with governance and arrange a review, and because the share is far above the threshold, a pre-issuance review is likely. (2.5)
Partner (2 marks). Eight years exceeds the IESBA limit of seven and the FRC expectation of five, a familiarity threat. The partner should be rotated off, with five years’ cooling-off. (2)
Loan (2.5 marks). A loan to a client’s subsidiary is not a normal bank loan from a bank client, so it is a self-interest threat and must be avoided. The firm should recover the loan or resign. (2.5)
Discount (2 marks). A 50% discount because of his role is not at arm’s length, a self-interest threat. The manager should be removed from the team, the ethics partner consulted, those charged with governance told and the audit plan reviewed. (2)
Conclusion (1 mark). The independence problems are serious enough that the firm should consider resigning if they cannot be cured. (1)
Pathfinder on independence and its threats
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Requirements for audit firm and audit partner rotation in a long-running audit of a Nigerian company. This topic gives the IESBA partner rules and the FRC numbers; the topic on regulation gives the firm rule.
Revise first: Long association and rotation
How fee dependence undermines independence even when it is disclosed.
Revise first: Fees, gifts and litigation
Situations that threaten integrity, objectivity and independence, and how a firm manages them.
Revise first: The five general threats
Section A is a single compulsory case with several requirements. It has drawn on ethics, quality management, group audits and reporting. Practise the scenario method in this topic before you attempt it.
Revise first: How to score full marks
Source: ICAN Pathfinder, Advanced Audit, Assurance and Forensics. Diets covered: May Diet, 2026 and November Diet, 2025.
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