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The value of an audit lies on the perception coming from users of audited statements on the auditor’s ability to detect errors or breaches in the accounting system and to resist client pressures to disclose such discoveries. Auditing will have value to the extent that users of financial statements believe that the auditor is capable and he will not omit or deliberately choose which findings should be reported.
The calculation of fees is a sensitive issue, where professional ethics and the interest of auditing did not allow that the prices budgeted are too high or too low. Inadequate fees pose a threat to subordination of judgment and independence, integrity and objectivity. Therefore, it is always difficult to determine what is an appropriate audit fee.
What Determine Your Audit Fee?
Malaysian Institute of Accountants (MIA) has published Recommended Practice Guides 7 (RPG 7) to all auditors in Year 1994 regarding audit fee calculation. It has been revised several times and subsequently withdraw on 1 June 2015. This recommended practice guide sets out the basis for establishing a reasonable level of remuneration, commensurate with the provision of professional assurance services of an acceptable and recognized standard. There are two bases for computation of fee:
Time management is essential in ensuring efficiency in audit performance while time recording is an integral part of the documentary evidence of work performed.
Time charge shall be reflective of time spent by the partner and staff in terms of the quality and level of competence required to meet the auditing standards with reference to the size, complexity and technical input expected of the audit assignments. A critical factor in maintaining the viability of a practice depends on good costing. The determination of charge-out rate is costing for audit practice.
In the absence of a uniform basis, charge-out rates may differ due to inadequate or over computation of the variable cost factors. MIA Council therefore recommends the basis for time charging as set out below. From past experience, cost computation based on the recommended basis will normally produce a factor of about 3 (three) times the direct labour cost.
Audit fees shall generally be based upon the degree of responsibility, risk and skill involved and the time necessarily occupied on the work.
Past empirical studies carried out by MIA have shown a proportionate correlation between audit fees charged, based on time charge, and the value of total assets or gross turnover or operating expenditure. Therefore, for consistency and harmonisation of the fee levels, MIA Council recommends that it is appropriate to determine audit fees using the Total Assets or Gross Turnover as shown in the financial statements and multiplying it with the coefficient percentages as shown in the coefficient percentage table (as shown below)
(i) Gross Turnover or Total Assets Basis
|Total Assets or Gross Turnover for every ringgit of||Cumulative Ringgit (RM)||Rate
|Fees (RM)||Cumulative Fees
|The first 100,000||100,000||1.000%||1,000||1,000|
|The next 150,000||250,000||0.438%||657||1,657|
|The next 250,000||500,000||0.313%||783||2,440|
|The next 500,000||1,000,000||0.188%||940||3,380|
|The next 1,500,000||2,500,000||0.125%||1,875||5,255|
|The next 2,500,000||5,000,000||0.100%||2,500||7,755|
|The next 5,000,000||10,000,000||0.094%||4,700||12,455|
|10,000,000 to 20,000,000||1,000 for every RM1,000,000 increase of a fraction thereof up to RM20,000,000|
|Above 20,000,000||Negotiable (but should not be less than RM20,000 per assignment)|
The choice of Gross Turnover or Total Assets as the basis must be relevant and reflects closely to the time charge. Only where it is not appropriate to use Total Assets or Gross Turnover, we may adopt Total Operating Expenditure basis which must be relevant and reflect closely on time charge.
(ii) Total Operating Expenditure Basis
|Total Operating Expenditure for every ringgit of||Cumulative Ringgit (RM)||Rate (%)||Fees (RM)||Cumulative Fees
|The first 50,000||50,000||2.500%||1,250||1,250|
|The next 150,000||200,000||1.250%||1,875||3,125|
|The next 800,000||1,000,000||0.625%||5,000||8,125|
|The next 1,000,000||2,000,000||0.250%||2,500||10,625|
Tips To Reduce Audit Fee
Due to the high inflation and difficulties in engaging qualified employee in Klang Valley, Malaysia, we expect the audit fee will be increasing over the time, therefore we suggest the following methods to help you in controlling your audit fee increment:
Using a reliable and updated accounting software
We notice our time consumed in manual bookkeeping (hand written or excel spreadsheet) audit is three (3) times compare to the time spent in auditing of the account with reliable and updated accounting software. Therefore, using accounting software is not only help in managing your business operation. It is also reducing the workload of auditor and lead to lower audit fee.
Well prepared documentation
Auditors take lots of time in searching documents to support their reasonable assurance about whether the financial statements of the Company as a whole are free from material misstatement. Thus, a proper arrange documentation will definitely help in reducing auditors’ workload and time consumption.
Improve internal controls
Improving internal control can have a direct effect on the effort and cost of external audits. Since paying your own people is cheaper than paying their people, improve internal control yourself is better than you are paying expensive audit at the end. If this percentage is not growing, ask your external auditor what process improvements they believe would increase their ability to rely on your internal control.
Hire knowledgeable staff
Having well-trained company staff involved with the audit will help reduce audit fees. It is even better if your staff have prior audit experience, this will make the audit work run smoothly and your audit fee will be lower.
Quick responses to auditor requests
An auditor needs to work as efficiently as possible to complete the work on time. This is one area where the company and its auditor share the same concern. The auditor wants to complete the audit as much as the company does. It’s frustrating to an auditor when completion is held up while waiting to resolve a few issues or deal with incomplete documentation. Quick responses to auditor requests also build trust, while long delays in getting requested materials and documentation can make the naturally suspicious auditor even more suspicious. It will help in time saving when client is responding fast and the job completed in a short time, thus the audit fee can be reduced as well.
Transparency to auditors
The proper way to handle a contentious accounting issue is for the CFO and controller to bring any unusual or questionable accounting treatment to the auditor’s attention in the early stages of an audit. Then they all can discuss the issue and resolve it. If financial officers answer the auditor’s questions directly, without trying to hide something or cloud the issue, then the client is likely to get fair consideration.
But if the auditor discovers that a questionable treatment wasn’t brought to his or her attention by the financial officers, a climate of distrust is created. Then, at the very least, the auditor will look for similar instances and be extremely conservative in his or her judgments.
Don’t close account at 31 December
Most of the business owner prefer their company account financial period same with calendar year, this has caused the auditor extremely busy in their “peak” period and need to work overtime to complete the job on time. Thus, the audit fee normally will be higher for 31 December year end company compare to other year end company in order to cover auditors’ overtime time cost.
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