How long and how much to do an audit?
A common question which I am asked quite frequently is ‘how much should I be charging for an audit’ and ‘how long should it take to do an audit?’.
Often these questions are asked because firms have lost an audit client to another firm who can do the job for substantially less than the outgoing firm has been charging and this often leaves firms perplexed because they, themselves, have often been wondering how a firm can charge up to, say 40% less, yet do the job in accordance with the ISAs. Firms have also asked me this question when they have been subjected to a quality control review from their professional body and they have run into problems because of poor quality audit work when they were under the impression they were doing things right.
This article will look at some of the issues firms need to consider when quoting for audit work, particularly due to the new standards which are starting to bite and how firms can ensure they do work in accordance with those standards.
It is fair to say that competition within the profession is fierce at the moment, and firms are struggling to balance compliance with regulation and surviving in a competitive environment. So how long should an audit take to complete and how much should we charge for it?
The answer to both questions is ‘it depends’. As all practitioners know, the more work involved and the more complex the assignment, the more the fees should be. In terms of the length of the assignment then again, this would all depend.
A common theme in the comments on my Directors Loan Accounts: Disclosure Issues article, and certainly from regular threads posted on Any Answers is that other authorities such as HMRC and Companies House are accepting accounts which fall short of the mark in terms of basic issues – this is undoubtedly also the case for audited clients and firms that are trying their best to do things right and fight their way through the red tape are often exasperated because of the increasingly burdensome requirements we all face nowadays, many of which are cited by those in the profession as being ‘over the top’ for SME clients who do not understand half of the disclosures or auditing requirements anyway. Firms (audit and non-audit) are also becoming increasingly irritated by the increasingly ‘lax’ attitude of the regulatory bodies such as HMRC and Companies House because practitioners are subject to rigorous legislation and standards which are seemingly ignored by the various government departments in many cases and allow negligently prepared accounts to slip through the net.
Whilst these bugbears are still very much with us, the fact still remains that we have to produce work (both audit and non-audit work) in accordance with prescribed standards which are required by professional institutes, in addition to our duty of care to the client. If we fall short of the mark, we have to be prepared to face the consequences!
This article will consider audit clients only, technical compliance issues for non-audit assignments have been covered in previous articles.
Audit firms should not just take on an audit simply because of the fee; there has to be consideration given to the complexity of the assignment, the available resources, the timescale involved, the degree of risk and such like. Many practitioners complain that other firms are ‘under-cutting’ them in attempts to secure the job, and whilst this is a fact of life within the profession, in a large majority of cases it is not necessarily a ‘ruthless’ tactic – clients come, clients go and that is a fact of life in our profession. Some firms have cheaper resources than others and could still perform an audit for much less than the outgoing firm and in today’s climate this is appealing to clients which, in the cold light of day, view the annual audit as a cost burden as opposed to adding value – particularly in times of difficulty.
However, it is fair to say that some clients do opt for the cheaper firm to do their annual audit because of the reduced fees; and this reduced fee may well be reflected in the work done on the audit during a compliance visit. Firms of accountants are like their clients – they work to make a profit and if firms are undercutting other firms of auditors (sometimes referred to as ‘lowballing’) then sacrifices have to be made and in some unfortunate cases, these sacrifices are in the quality of the audit work.
All statutory audits have to be done in accordance with the ISAs. Like it or not those are the rules and firms who deliberately undercut in attempts to get the client’s audit onto their books must still be prepared to do the work in compliance with the standards. Usually when the thresholds increase a large number of clients fall out of the audit regime and are then able to apply audit exemption. However, for those that still remain in the scope of audit, either because they are mandated to have an audit, or the client chooses to have one, ISAs must be complied with.
Professional regulators have always had a ‘gripe’ about audit firms who do not devote enough time to audit planning, or who express an unqualified audit opinion when they (knowingly or not) have failed to generate sufficient evidence to support that opinion. Firms cannot just get away with producing an ‘extended’ accounts preparation file as a substitute for an audit file (and this does happen in a lot of cases). Firms who do this, or cut too many corners, face disciplinary action, as well as a bit of publicity in the professional magazines – publicity which the firm and its audit partner(s) would rather not be subjected to as it usually comes with a hefty price tag as well in the form of a fine!
A common question which is asked of me when I visit other firms and lecture qualified accountants is ‘how long’ should it realistically take to do an audit? Again, there is no set time limit, the ISAs do not prescribe how long it should take to complete the assignment. However, I have heard of firms who claim to be able to do an audit, from start to finish in one day – two maximum! Having worked in audit for a long time, I strongly suspect that an audit which takes this length of time may not comply fully with the ISAs. For a typical £7 million turnover company with good internal controls, sound structure and no prior year problems or current ‘extraordinary’ problems, planning alone should take a good couple of days (certainly at least one day and that is being overly generous), if you are to do it in accordance with the ISAs, as this would involve the audit team planning meeting, discussions with the client, updating the permanent file, reviewing the engagement letters (and updating if necessary), building the planning notes, performing initial analytical procedures, developing the audit plan and such like. Then comes the detailed fieldwork. If firms are involved in the accounts preparation side of things then audit evidence can be obtained from the accounts preparation file which could reduce the time spent on the detailed testing, but if not then audit firms will have to consider how they are going to gather the evidence to support the amounts and disclosures in the financial statements; this evidence is not just agreeing the amounts in the financial statements to the trial balance. For a first time audit this process will often take longer due to having to get a thorough understanding of the client and performing audit work on the opening balances.
In some cases statutory audits may take a considerably shorter length of time if, for example, it is a very small company with hardly any activity that is part of a ineligible group. Invariably, however, audits of SMEs involve a client with more than £6.5 million turnover of £3.26 million gross assets and as such sufficient planning must be done in accordance with ISAs 300, 315 and 330 and this work needs to be demonstrable. Firms will often cut corners on (or not even bother with) the planning process if the fees will not cover the work needed.
Firms who are subject to fee pressures from their client, or who deliberately undercut another firm to secure the audit run the risk of cutting too many corners in order to make the audit worthwhile in terms of fees. The new ‘clarity’ ISAs will increase the work involved (admittedly there are varying degrees of ballpark percentages being bandied around as to how much work will actually increase), though notwithstanding the increase in work, firms have to make sure they comply with the ISAs.
During regulatory inspections, firms will be asked by inspectors to let them review files so they can check compliance with the auditing standards and other legislative requirements, such as Companies Act 2006 and Ethical Standards. Firms run into trouble with inspectors when it is blatantly obvious that they have failed to even try to comply with the standards and often it is simply because of fee pressures or a lack of understanding as to how to apply the ISAs. Fee pressure turns into time pressure on the audit and not enough work is done to gather evidence to support the financial statements, which results in firms winning an appearance in the disciplinary pages of their professional magazine for failing to gather enough evidence to support an unqualified audit opinion.
At the same end of the spectrum are firms who choose to sign auditor’s reports without being eligible to do so; or even firms which are statutory auditors, but who allow staff that are not authorised to sign auditor’s reports to do so. This is an unforgiveable action and in fairness to firms who do try to do things ‘by the book’ those firms who deliberately depart from the legislation deserve to be disciplined accordingly.
Another popular choice for appearing in the disciplinary pages is where firms sign an auditor’s report but do not actually do the audit (again usually due to fee pressure from the client!) This is not uncommon and I have come across instances where firms have been subjected to disciplinary for this exact instance, but who complain that the ISAs are too vast and the client is not prepared to pay. If the client is not prepared to pay for the audit, you do not do it! If another firm is prepared to do it for next to nothing, then so be it. Invariably, a ‘next to nothing’ fee involves ‘next to nothing’ work.
Frequent auditing ‘issues’ cited by professional institutes include:
- Failing to devote sufficient time to planning
- Providing an unqualified audit opinion without obtaining sufficient and appropriate audit evidence
- Lack of structure to audit files
- Disclosure errors or omissions and failure to complete a disclosure checklist
- Lack of audit engagement partner involvement
- Independence issues (particularly firms who are involved in the accounts preparation and then the subsequent audit)
- Out of date engagement letter, or no audit engagement letter on file
- Letters of representation signed after the date of the auditor’s report
- Applying audit exemption incorrectly
Having met lots of practising accountants and auditors on lectures, there is a recurring question which is asked and that is along the lines of ‘am I doing this right?’. In many cases firms will only have weaknesses identified to them when they are being subjected to a compliance visit by their professional bodies and in some unfortunate cases this is often too late. Some professional institutes require their member firms to submit audit files for cold review on an annual basis, others consider this to be ‘best practice’ but not mandatory. However, I advise all audit firms, small and large to submit at least one file for external review at least annually (whether compelled to or not). Doing this will enable you to receive feedback on the audit work and for you to take remedial measures to correct deficiencies, if necessary. Given the complexity and burdensome standards which we are faced with in today’s modern auditing profession, such reviews are invaluable.
This advice is accentuated by the new ‘clarity’ ISAs which are starting to take effect. More onus has been placed on auditors in already contentious areas, such as related parties, and firms must be up to speed with how the new standards will affect them – do not place total reliance on your audit programmes as during regulatory visits the inspectors will consider you to be at fault in the event of non-compliance with the ISAs, not your software provider.
There is no set timescale as to how long an audit should take, nor is there a ‘menu’ of ideal fees to charge – it takes as long as it takes if it is to be done in accordance with the rules. Usually fees are agreed in advance but audit firms must take care not to agree to a low fee which would compromise the quality of the audit work. There is also no prescribed numbers of lever arch files which the audit work should take up – quality is more important than quantity but nowadays (since the introduction of ISAs) files have increased significantly from the old SASs. Remember, how much evidence constitutes ‘sufficient and appropriate’ audit evidence is a matter of professional judgement, but again this professional judgement has to be justified and realistic. The inspectors are keen to make sure that the audit evidence you have obtained supports the opinion you have expressed and inspectors will be able to identify where firms are ‘corner-cutting’ to excess. As long as you can demonstrate that you are at least trying to comply with the regulation you should be fine. Firms that consider themselves to be above the ISAs or who choose to ignore them do so at their peril!
On the fee level, if you can charge a low fee than the proposed outgoing auditors, this must not compromise on the audit quality!
Steve Collings is the Audit and Technical partner at Leavitt Walmsley Associates Ltd. He is also the author of ‘The Interpretation and Application of International Standards on Auditing’ (published February 2011) and lectures on financial reporting and auditing issues.