“How much will the audit cost? It is a fair question, but our response will be, “to give you a quote we need to know a bit about your business.”
So, what factors go into deciding how much the audit will cost?
The auditor’s constraints
Audit and accounting standards control the auditor’s work. Whichever approach we use, our work must meet the standards.
Our work is also subject to review by regulators. They can criticize and penalize us for the quality of our work.
To the meet the standards and satisfy the regulators, we must perform certain procedures. We keep these constraints in mind as we price the audit.
Factors that go into the price
There are several factors, but the major ones are:
- Internal control
- Resources and time
- Client’s support
Risk drives our work. Our approach, resources and time required depends on our assessment of risk. Some factors we consider are:
- Size and spread—Is it a small or big business? Does it operate from one or several locations?
- Industry—what industry is the company in? Industries have an inherent risk e.g. banks face more risks than a retail operation.
- Technology—does the business use IT systems? Is it complex? Banks, for example, use complex IT systems.
- Quality of management—the quality of management drives the risk of reporting. So, we will try to gauge the quality of management.
- Regulation—is the industry regulated?
- Evidence—is it easy to get? Is it easy to verify?
Our assessment of risk affects the price of the audit. A risky audit will cost more than a similar audit that is less risky.
Internal control is the arrangement that management employs to ensure they achieve their business objectives, prepare accurate financial reports and comply with the laws.
The goal of internal controls is to reduce the risks that affect the entity’s ability to achieve its goals for operations, financial reporting and compliance with relevant laws.
Good internal controls reduce the cost of an audit, but poor internal controls increase the cost of an audit.
Managers often do not understand the power of internal control, so they do not install strong internal controls. In many companies in Ghana, this weakness drives up the cost of an audit.
Resources and time
The factors discussed above also affect the quality of personnel and other resources that go into the audit.
Some factors we consider are:
- Do we need to specialists on the audit, or can we run the audit with generalists?
- Number of people do we need for the audit.
- What sort of tools do we need? In a computerized system, we will need to deploy additional tools to do the audit.
Accountants are not cheap. The more specialists and experienced people we need, the higher the cost. More people means higher cost; less people means less cost.
The longer the time to complete the audit, the higher the cost.
Timing of the audit
The audit business in Ghana is seasonal. From January to June, audit firms can be very busy. They are less busy after June. The audit will cost you a lot more if it falls within the January to June season. You get a lower price in the off-season period.
The good news is, the client’s readiness and support reduce the cost of the audit. If the client has good accounting systems with sound controls, and can provide evidence and explanations, this will reduce the time and cost of the audit.
If it takes a long time to provide evidence and the client’s staff are not responsive, the time to finish the audit will go up; so, will the cost of the audit.
How much will the audit cost? It depends on many factors. the main ones are:
- Risk—high risk leads to high cost; low risk implies a lower cost.
- Internal control—good controls reduce the cost. Poor controls increase cost.
- Resources and time—the level of experience and the number of people on an audit affects the cost. If we must use more experienced staff, the cost will go up.
- Seasonality—the audit will cost more in the busy period of January to June.
- Client support—the client’s readiness and support for the audit affects the time spent on the audit. If the client is ready and supportive, the cost will be less than if he is not.
We weigh these factors in determining a fair price for our work. The good news is, your situation influences the cost of an audit, and you can do something about it.
All the serious audit firms go through a process like the one outlined above.