Introduction
The value of an audit depends on the trust users of financial statements have in the auditor’s ability to uncover errors or misconduct in the accounting system. It’s crucial that auditors maintain independence, integrity, and objectivity, resisting any pressure from clients to hide their findings. Calculating the right audit fee is a challenging task, balancing professional ethics and the need to ensure the audit’s quality.
Determining Your Audit Fee
The Malaysian Institute of Accountants (MIA) issued Recommended Practice Guide 7 (RPG 7)
in 1994, offering guidance on audit fee calculation. Although it was later withdrawn in 2015, it provides valuable insights into how audit fees can be structured. Two primary bases for computation of fees emerged:
1. Time-Based Fees:
This approach calculates fees based on the time spent by the audit team, considering the complexity and technical input required. The charge-out rate is typically around three times the direct labor cost.
2. Value-Based Fees:
In this method, audit fees correlate with factors like total assets, gross turnover, or operating expenditure. This approach aims to reflect the responsibility, risk, skill involved, and time spent on the audit.
Audit Fee Calculation Tables
-Total Assets or Gross Turnover Basis:
– Total Assets or Gross Turnover
– The first 100,000: 1.000% (Fees: 1,000 | Cumulative Fees: 1,000)
– The next 150,000: 0.438% (Fees: 657 | Cumulative Fees: 1,657)
– The next 250,000: 0.313% (Fees: 783 | Cumulative Fees: 2,440)
– The next 500,000: 0.188% (Fees: 940 | Cumulative Fees: 3,380)
– The next 1,500,000: 0.125% (Fees: 1,875 | Cumulative Fees: 5,255)
– The next 2,500,000: 0.100% (Fees: 2,500 | Cumulative Fees: 7,755)
– The next 5,000,000: 0.094% (Fees: 4,700 | Cumulative Fees: 12,455)
– 10,000,000 to 20,000,000: 1,000 for every RM1,000,000 increase or fraction thereof up to RM20,000,000
– Above 20,000,000: Negotiable (but should not be less than RM20,000 per assignment)
- Total Operating Expenditure Basis:
– Total Operating Expenditure
– The first 50,000: 2.500% (Fees: 1,250 | Cumulative Fees: 1,250)
– The next 150,000: 1.250% (Fees: 1,875 | Cumulative Fees: 3,125)
– The next 800,000: 0.625% (Fees: 5,000 | Cumulative Fees: 8,125)
– The next 1,000,000: 0.250% (Fees: 2,500 | Cumulative Fees: 10,625)
– Above 2,000,000: 0.125% (Fees: Varies)
Tips to Control Audit Costs
a) Utilize Accounting Software: Modern accounting software can reduce manual bookkeeping efforts, making the audit process more efficient and lowering costs.
b) Organized Documentation: Well-organized documentation simplifies the audit process, reducing auditors’ workload and time consumption.
c) Enhance Internal Controls: Improving internal controls can directly impact the cost of external audits, as efficient controls reduce the time auditors spend verifying information.
d) Hire Knowledgeable Staff: Employing staff with audit experience can streamline the audit process, leading to lower fees.
e) Prompt Responses: Quick responses to auditor requests facilitate efficient audits, potentially reducing fees.
f) Transparency: Open communication and transparency with auditors, especially regarding accounting issues, fosters trust and ensures fair consideration.
g) Avoid December Year-End: If possible, avoid setting your company’s financial year-end on December 31st, as it’s a peak period for auditors, potentially resulting in higher audit fees due to overtime costs.
By following these simplified strategies, you can control audit fees and ensure a smoother audit process.