The Word of Caution and the Good News for Auditors:

The auditor is now required to ensure zero outstanding of audit fee before signing current year audit report as per the Revised Code of Ethics.

Legal Position as per Code of Ethics, 2019

Section 410.7 A1

  • A self-interest threat might be created if a significant part of fees is not paid before the audit report for the following year is issued.
  • It is generally expected that the firm will require payment of such fees before such audit report is issued.
  • The requirements and application material set out in Section 511 with respect to “Loans and Guarantees with an Audit Client” might also apply to situations where such unpaid fees exist.

Audit Report - Ring Binder in the office

Section 410.8 R

When a significant part of fees due from an ‘audit client’ remains unpaid for a long time, the firm shall determine:

  • Whether the overdue fees might be equivalent to a loan to the client; and
  • Whether it is appropriate for the firm to be re-appointed or continue the audit engagement.

Section 511.4 R

A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not make or guarantee a loan to an audit client unless the loan or guarantee is immaterial to:

  • The firm, the network firm or the individual making the loan or guarantee, as applicable; and
  • The client.


Q1. What does ‘Audit’ referred above include?

  • In simple words, here ‘Audit’ includes every engagement on which “Standards on Auditing (SAs)” and “Standards on Review  Engagements (SREs)” apply.
  • Therefore, Statutory Audits as well as Tax Audits under Income Tax Act, 1961 are included.

Q2. What does ‘Audit’ referred above exclude?

  • Internal Audits
  • Bank Concurrent Audits
  • Stock Audits
  • Certifications
  • Due Diligence

Q3. What does ‘Audit Client’ referred above include?

  • An entity in respect of which a firm conducts an audit or a review engagement.
  • When the client is a listed entity, audit client will always include its related entities.
  • When the client is not a listed entity, audit client includes those related entities over which the client has direct or indirect control.

Q4. How about if only Audit fee component of overall outstanding fees for previous years is received before signing of next audit report?

  • Auditor may achieve compliance with section 410.7, but compliance of section 410.8 read with section 511.4 needs to be assessed.
  • Section 410.8 requires Auditor to determine whether the overdue fees might be equivalent to a loan to the client, where a significant part of fees from an audit client remains unpaid for a long time.
  • Section 511.4 prohibits an Auditor or Audit Firm to make or guarantee a loan to an Audit client, unless the amount is immaterial to both giver and receiver.

Q5. What are the safeguards or alternate course of actions in such situations?

Examples of actions prescribed under Code of Ethics, 2019 include:

  • Obtaining partial payment of overdue fees.
  • Having an appropriate reviewer, who did not take part in the audit engagement, review the work performed.

Q6. Does this provision really have any practical relevance?

  • Undoubtedly yes!

In one of the Professional Misconduct cases dealt with, which involved SFIO investigation, SFIO highlighted and objected the continuation of audit engagement by the Auditor despite ‘unpaid outstanding audit and non-audit fees’ from audit client for long and held the Auditor to be a party to the fraud committed by the audit client, as the independence of auditor was already compromised due to continuation of audit year after year despite long outstanding unpaid fees.

Author Bio

Qualification: CA in Job / Business
Company: P2P Enablers Private Limited
Location: New Delhi, Delhi, India
Member Since: 02 Dec 2019 | Total Posts: 3
CA Ayush Jain has conceptualized a unique start up "P2P ENABLERS PRIVATE LIMITED" ( which is exclusively assisting the Professional Firms in their growth as well as leading the flawless professional life. View Full Profile

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  1. Mahendra says:

    What if the auditor doesn’t issue any invoice upto 3 years claiming books of account on cash basis
    And then ask client to pay around Rs. 1 lac for 3 years fee?

    1. aj.ayushjain says:

      Since previous years have already been passed, it is recommended to receive such Rs 1 Lakh audit fee before signing current year audit report.

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September 2021