Which action would most clearly introduce an independence concern in fact?

• A. The auditor has a non-financial, non-material interest unrelated to the client.
• B. The auditor discounts fees for the client.
• C. The auditor accepts a loan from the client with favorable terms.
• D. The auditor's spouse works in the client's IT department.

Answer: (C)

Independence is most clearly compromised when the auditor has a direct financial interest in the client. Accepting a loan from the client with favorable terms creates a financial self-interest threat: the auditor now has a personal stake tied to the client’s outcomes, which can bias judgments, risk assessments, or conclusions about the financial statements. The favorable terms amplify this concern because they signals a benefit the auditor could be reluctant to jeopardize, making objective evaluation less certain.

Other scenarios involve risks to independence as well, but they’re less direct. A non-financial, non-material interest is typically not a threat to independence. Discounting fees can create a financial motive, but it’s less about an ongoing financial stake and more about pricing; it doesn’t attach a present financial benefit tied to the client’s outcomes in the same way a loan does. A spouse in the client’s IT department introduces familiarity or perceived bias, but the direct financial tie of a loan is a stronger, clearer independence concern.