The correct answer is: An offer from a large private company to carry out the annual audit for a fee which represents 20% of Hugh's total fee income.

The Code of Ethics does not specify a threshold level of fees for private company audits, but 20% is quite high. The significance of the threat depends on:

• The operating structure of the firm;

• Whether the firm is well established or new; and

• The significance of the client qualitatively and/or quantitatively to the firm.

The fact that Hugh only recently set up his business meets the 2nd of these criteria. Hugh is probably expanding his business, and so is not as dependent on this one client as he would be if he were not already growing. The Code allows a little leeway in situations such as this, so the engagement is likely to be acceptable in principle.