Final answer:
An auditor's independence is likely to be impaired if the prior year's audit fee has not been paid and will not be paid for at least twelve months. This situation might create a financial dependence on the client which poses a threat to independence. Other options might not impair independence unless accompanied by other factors.
Step-by-step explanation:
When an auditor is about to commence a recurring annual audit engagement, their independence is crucial to ensure the credibility of the audit results. Auditor independence may be considered to be impaired if certain conditions related to the payment of audit fees from previous years are present. Looking at the options provided:
- A. An unusually large audit fee alone would not ordinarily impair independence unless there were other factors that might create a self-interest threat.
- B. If the prior year's audit fee has not been paid and will not be paid for at least twelve months, the auditor’s independence would be considered impaired because this might create a financial dependence on the client.
- C. If the client has filed for bankruptcy, this fact in itself does not impair independence regarding unpaid audit fees, provided the auditor takes appropriate measures to mitigate any independence concerns that may arise from the client's financial condition.
- D. Renegotiating the audit fee during the prior year's audit due to expanded testing does not necessarily impair independence, as long as the renegotiation is for legitimate reasons related to the scope of the audit work and not due to pressure from the client.
Therefore, the most likely condition to impair an auditor's independence in this context would be option B, where the audit fee has not been paid and there is an expectation that it will not be paid for an extended period.