Auditor independence test
Also written Auditor fee test
The corporate-governance check that an auditor's total fees from a company or group stay below 10% of the auditor's overall income, so it is not financially dependent on that one client.
In plain language
An auditor who earns most of its income from one client has a reason not to upset that client. Independence gets harder to maintain when a firm's livelihood depends on it.
The workbook's governance check for this is a fee test: how much of the auditor's total income comes from this one group, across every service it provides, not just the audit itself.
How it works
The workbook: "For an auditor to be able to be truly and completely independent, it is necessary that they should not be over dependent on the fees earned from a given corporate entity or a business group. Accordingly, it is important to check if the auditor remuneration for all the services they provide to the group/entity is less than 10% of their overall income."
The key phrase is "all the services" — the 10% test covers statutory audit fees plus tax advisory, consulting and any other work the same firm does for the group, not the audit fee alone.
A worked example
An audit firm has total annual income of Rs 20 crore. It earns Rs 1.2 crore from statutory audit work for Client Ltd, plus a further Rs 1.3 crore from tax and advisory assignments for the same group.
Total fees from Client Ltd = 1.2 + 1.3 = Rs 2.5 crore
2.5 ÷ 20 = 12.5% of the auditor's overall income
That fails the 10% test — even though the audit fee alone (Rs 1.2 crore, 6%) would have passed. It is only once the advisory work is included that the dependency becomes visible, which is exactly why the test covers all services, not the audit fee in isolation.
Why NISM asks about it
Chapter 7.6.2(iv) sets out the auditor independence test. Expect a question that gives separate audit and non-audit fee figures and requires you to add both before testing against the 10% threshold — the version testing only the audit fee alone is the trap answer.
Common exam traps
- The 10% figure is a share of the auditor's overall income, not of the client's profit or revenue. Applying the percentage to the wrong base is the most common error.
- The test covers "all services," not the statutory audit fee alone — leaving out advisory or tax fees understates the true dependency.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Agency riskThe risk that a company's management, who control day-to-day decisions, pursue their own interests rather than those of the shareholders who actually own the business.
- Audit committeeThe board sub-committee responsible for reviewing a company's financial statements and nominating its auditors, which SEBI requires to be at least two-thirds independent directors.
- Auditor rotationThe corporate-governance rule that a company's statutory auditor must be changed at least once every five years, so a long-standing relationship cannot let facts stay hidden.
- Corporate governanceThe rules, processes and procedures followed in running a company, judged by an analyst against a checklist of board, audit and related-party tests rather than by reputation.
- ESG frameworkA framework in which investors assess a company on environmental, social and corporate governance criteria, used as a screening filter before the usual financial analysis is done.
- Nomination committeeThe board committee that appoints independent directors, which the workbook says should ideally consist exclusively of independent directors so that company executives have no role in the appointment.