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Sir, may I ask why lowballing is not allowed and create self interest threat?
What I understand of lowballing is that the firm charge lower fee for audit services, with the intention to attract client to buy their non-audit service which then they can charge a higher price from there to make a decent profit.
So why does it create threat? Why the audit quality will be compromised? Eventually the firm will still get their expected profit from that particular client, just through different channel?
Because why would you carry on with a loss-making activity (audit) if you’re not successful in attracting the profitable activity (non-audit)
So, in order to reduce the extent of the loss maker, you may be tempted to cut corners and thus compromise audit quality
In addition, it is now the case that audit firms should not undertake non-audit work for their audit clients so the prospect of non-audit fees has been taken away
Low-balling applies whether or not you are chasing non-audit work
Imagine that you are in a very competitive market and you have spare capacity in your human resource. Maybe it is better to win audits that are loss-makers but at least they would make a contribution towards the fixed cost of employing your staff
But then the same point arises … would you be able to resist the temptation of cutting corners to minimize losses on those audits?
OK?
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