1. 38 FEBRUARY 2014
BUSINESS
T
he answer to the question posed here – whether audits
can be more profitable while achieving quality – is a
resounding “yes”. It is possible to increase efficiency and
improve your realisation rate, yielding more profit on
audit assignments both large and small, without compromising
quality. Some accounting firms view their audit business as a
loss leader to attract more profitable tax, financial planning
and business advisory work. But this does not have to be the
case, there can still be good margins in auditing, which in turn
can further promote increased audit quality.
There have been significant changes in auditing standards
over the past few years, including adoption of the International
Standards on Auditing in New Zealand (ISAs (NZ)). This has
resulted in more demands on auditors, who have therefore had
to continuously upgrade their skills in order to comply with
these professional requirements. In addition, organisations are
becoming increasingly complex, which from an audit perspective
often involves more professional judgment – a skill generally
limited to the more senior members of the audit team. This article
provides guidance on some of the principles of charging audit
fees, along with some techniques to help firms audit smarter.
AUDIT FEES
Auditors are advised by PES 1, Code of Ethics for Assurance
Practitioners that when charging fees they should ensure that
their objectivity is not impaired by the hope of financial gain,
and that such fees are proportional with the responsibilities they
assume. On this basis, the charging of any sort of contingent
fees for audit engagements is prohibited. Auditors should be
particularly careful to ensure that there is no threat that audit
quality will be adversely affected because the fee charged is
insufficient to allow the necessary amount of time and skill to
be spent for this purpose. There are many different bases for the
computation of audit fees, and the value-based and time-based
methods are explored later. The computation of an appropriate
audit fee involves value judgment. It should take into account
the value of the service rendered by the auditor, along with the
benefits, tangible and intangible, derived by the client.
A substantial proportion of the costs of running a practice
are salary related. Auditors are justified in increasing their audit
fees to ensure their remuneration is competitive, particularly
considering the auditor’s responsibility and commitment to
continuing professional development (CPD). Furthermore, a
reasonable level of remuneration should encourage auditors to
maintain or even improve the quality of the audits they carry
out. On the other hand it is the auditor’s obligation to give
their clients value for the fees charged. Accordingly, auditors
should make sure that the methods used in their offices are
current and efficient.
FEE INCREASES
Surprisingly for a profession that is so closely associated
with money, many auditors prefer to avoid talking about fee
increases. Many auditors either discount their prices or do
not increase their prices because they are afraid of having a
difficult conversation with clients and losing their business.
Auditors often do not increase their fees as they see it as a way
to retain clients over the long term, but this is a dangerous
route to go down.
An even riskier path is that of fee reductions, as this can
adversely affect audit quality. There is a significant amount of
fee pressure in the market place, and the collective mentality
of undercutting to buy market share should be avoided. The
Financial Markets Authority (FMA) recently indicated at the
national NZICA Audit Conference that it does not expect audit
fees to decrease, except in cases where the client’s operations
have become markedly simplified.
Clients should expect fees to go up so that auditors can cover
the increasing overhead costs, and to recognise that audits are
becoming more complex, requiring further involvement from
the more experienced members of the audit team. The FMA
is reinforcing this message to the market at every opportunity,
but it is likely to take a collaborative effort to change market
attitudes towards audit fees. Auditors need to get into the habit
of regularly reviewing their fees and adjusting them accordingly,
because if they have not done so for a few years it becomes
increasingly hard to put them up.
Audit typically does not just come down to price, and people
often confuse pricing and costing. It is a difficult balance to
strike at the best of times, and the current economic climate
BY ZOWIE MURRAY CA
AUDIT PRICING POLITICS
Can audits be more profitable while achieving quality?

2. 39FEBRUARY 2014
BUSINESS
makes the challenge even harder. Be up front by communicating
with clients – explain fees to manage their expectations, and
either work towards an agreed fee schedule linked to a service
plan, or only set an indicative price.
Invoices should be brief yet educative, and charges for other
lines of service should be unbundled. For example ensure that
any secretarial, tax, accounting and consulting is not included in
the audit fee. Disbursements should also be disclosed separately.
You should consider billing as near as possible to completion
of the work and contact clients in advance of overruns.
ALTERNATIVE PRICING OPTIONS
When applying value-based billing, the auditor must uncover
the value drivers of the service provided. Value drivers are those
elements that assist the auditor in satisfactorily discharging their
professional obligations. Generally knowledge, information
technology and quality of internal processes are the drivers of
value. During the course of the audit, the auditor should impress
upon clients the value that is being delivered. Fees charged for
audits should be a fair reflection of the value to the client and
should recognise the following attributes:
• the skill and knowledge required for the type of work
involved
• the professional judgment that was called upon
• the level of training and experience of the people engaged
on the work
• the time occupied by each person engaged on the work
• the degree of responsibility and urgency that the work
entails.
Time-based billing has been very useful in the past in working
out how much to charge a client for an audit, and it appears to
be a fair and transparent principle in that it rewards efficient and
organised clients. Traditionally this hourly rate was calculated
on the basis of a third salary costs, a third overheads, with the
remaining third being profit. However, this composition does
not necessarily hold true now, in many cases both salaries
and overheads have increased, so the profit margin is being
squeezed. Under this method there is a danger of arbitrary
fixing of charge-out rates due to erroneous recording of time
sheets, resulting in undervaluing the audit fees being billed to
the client. Also time-based billing provides little incentive to
provide excellence in client service.
Many practitioners like the idea of value-based billing but
struggle with how to change from their current time-based
methods, as it involves a programme to replace timesheets and
hourly billing. However, whichever method is used, tracking of
time spent on jobs is imperative for good practice management.
BEST PRACTICE
The key to greater profitability is efficiency, not in the sense
of cutting corners but in that of greatest results from minimum
outflow of resources. Quality and efficiency are not mutually
exclusive. Efficiency means better use of time and a higher
realisation rate and there are various practices to increase
efficiency. Client and staff behaviour both drive margin, in
terms of quality client records and efficient staff.
The auditor’s job is to perform procedures on data, not
collect them. That is the client’s job, and do not be afraid
to ask the client to do it, staff should not be “mining” for
information. The better trained a client is to provide data,
the more efficiently the audit can be performed. There is no
time like the present to review last year’s audit and draw up
a list of deliverables. Clients respond to financial incentives,
so it is worth considering a statement in the engagement letter
that overruns will be charged if deliverables are not provided
in a timely manner. Nothing concentrates a client’s mind
like showing them how they wasted money. A discussion at
the clearance meeting of how the audit deliverables could
have shortened an engagement will reverberate throughout
the year.
BE UP FRONT BY
COMMUNICATING WITH CLIENTS
– EXPLAIN FEES TO MANAGE
THEIR EXPECTATIONS, AND
EITHER WORK TOWARDS AN
AGREED FEE SCHEDULE LINKED
TO A SERVICE PLAN, OR ONLY SET
AN INDICATIVE PRICE

3. 40 FEBRUARY 2014
BUSINESS
AT A GLANCE – TOP 10 TIPS
1 Plan ahead
2 Delegate data collection tasks to the client
3 Perform a risk assessment at the financial statement
and assertion levels
4 Replace substantive tests of detail with analytical proce-
dures where possible
5 Track time spent on jobs accurately
6 Contact clients in advance of overruns
7 Impress upon clients the value that is being delivered
8 Make use of technology
9 Carry out a customer profitability analysis
10 Reward staff with appropriate motivators
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Technology can also enhance efficiency dramatically by
cutting down on the paper trail and increasing a firm’s analytical
capacity. But it is all too easy to let it increase a firm’s workload
by taking on tasks that should be delegated to the client, just
because the firm has the technology to do it. Keep a firm hand
on the audit deliverables list despite this temptation.
Cull your client list by actively fashioning the most lucrative
and worthwhile client base by dropping high-risk, low-margin
clients and acquiring stable clients with good reputations.
The most profitable firms plan ahead and a little advance
planning now can pay tremendous dividends. An extensive
planning process to make sure the whole team is on the same page
may be right in one situation but not in another. Obviously some
planning is necessary to prevent inefficiencies and over-auditing,
such as a site visit, learning about the client’s operations, business
and industry and considering client risks. An experienced firm
auditing a familiar client might have that information already
and will need to do little more than look over last year’s audit
file and think about what should be done differently.
Risk assessment at the assertion level is a major contributor
to audit efficiency, and allows the auditor to concentrate
on the areas of greatest risk. Practice review results show
that this is an area where there is scope for improvement.
Analytical procedures are more efficient than substantive
tests of detail, and in low-to-moderate risk areas can even
be used exclusively. Appropriate replacement of substantive
tests of detail with analytical procedures can reduce the time
required for an audit.
Dedicated, loyal and experienced staff means continuity
and familiarity with clients, which is key to efficiency. Ensure
that your staff are adequately compensated, provided with
interesting work and empowered in firm decision making.
Extra steps might include casual dress, flexible hours and
a growth plan that clearly sets forth opportunities for
advancement.
THE WAY FORWARD
Audit is generally more stable than some other service lines and
audit is rarely the lowest margin line of service. Consulting, for
example, can have a higher risk profile than audit. Audit has a
more steady income stream, more stable cost base and a higher
proportion of repeat business and significant long-term clients.
The important thing is probably not what you do, but how
you do it. There is no magic to profitable audits, just the diligent
application of sensible practices and methodologies. Firms
that streamline the audit process, adopt an approach based on
risk and materiality, manage their clients and carefully shape
their client base, commit themselves to enlightened policies of
staff retention, and use all of these practices to leverage their
experience and judgment are positioning themselves to achieve
higher realisation and greater success.
Zowie Murray CA is a Technical Advisor on NZICA’s Technical
Services Team.

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