Auditing is an intricate and time-consuming process, and it needs to be compensated as such. Companies often rely on auditors to ensure their financial records are accurate and that business processes follow government regulations.
This comprehensive guide will give a basic outline of how much an auditor can charge you.
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When do I need to hire an auditor?
A company in the UK needs to conduct a statutory audit once a year unless you are eligible for exemption. Some significant reasons for an audit are to check compliance with regulations, add an extra layer of confidence in your financial statements, and ensure your business processes follow industry norms.
A company is eligible for audit exemption if they satisfy two of the following three criteria:
● Business annual turnover is £10.2m or less
● Total assets worth in the company is not more than £5.1m
● You are working with 50 or fewer employees
Furthermore, if your company belongs to any of the following categories, you must have an audit.
● A public company, unless it’s dormant
● A subsidiary company, unless it’s eligible for exemption
● An authorised insurance company
● A company carrying out insurance market activity
● Business is involved in banking
● An issuer of e-money
● A MiFID investment company
● A corporate body having shares traded on a regulated market
● A funder of a master trust pension scheme
● A special register body
● A pension or labour relations body
Plus, even when your company is eligible for exemption, you must do it immediately if shareholders, investors, or regulators ask for an audit.
How much is the cost of hiring an auditor?
The cost of an auditor in UK depends on the number of tasks they do, the business size, and the complexity of the audit.
Depending on the client’s revenue, audit costs can be categorised as follows:
● For revenue between £5m – £10m, the audit fee is 0.25% of the revenue
● For revenue between £10m – £25m, the audit fee is 0.19% of the revenue
● For revenue between £25m – £50m, the audit fee is 0.15% of the revenue
● For revenue between £50m – £100m, the fee is 0.12% of the client’s revenue
● For revenue over £100m, the audit fee is 0.10% of the revenue
There is no menu for audit fees; therefore, it can change depending on factors like complexity, location, inventories, involvement of experts like actuaries and professional valuers etc.
Do audits always need to be expensive?
External audits can be cost-effective if you are prepared and have all accounting staff present on board during the audit. Additionally, keep the key documents prepared for a smooth audit process. Some of these are:
● Financial records
● Directors report
● Year-end bank reconciliation statement
● A detailed balance sheet with sufficient invoices of purchase and expenses
● A list of accounts payable and receivables
● P11D tax returns and employee wage records
● Inventory reports
● Hiring, purchase and leasing agreement
● VAT returns, if registered for VAT
● Summary of any incident that occurred after closing the balance sheet
● Internal audit reports, if applicable
When you have prepared such things beforehand, your auditor doesn’t need to perform extra work and thus can charge you less.
How is the price of an audit determined?
The price of an audit is determined by the amount of work needed to complete the audit. It will be tailored to meet the specific needs of the entity being audited. However, the general duties of an auditor include the following:
- Evaluate the risk of material misstatement of financial statements and determine if it is still existing
- Evaluating internal controls relevant to the audit to develop audit procedures that meet the requirement, but not to give an opinion about the effectiveness of the internal control in the business.
- Analysing the directors’ business accounts and tax affairs, and depending on the audit evidence collected, determines whether there is any material uncertainty related to business processes or conditions that may adversely affect the organisation’s capability to continue as a going concern.
- Looking into the presentation, structure and content of financial statements, including disclosures, to determine whether they portray the underlying transactions fairly
- Speaking with the governance team about the planned scope and timing of the audit and any evidence found during the audit
How long does it require to finish an external audit?
There is no fixed time to finish an audit. Suppose a company has £7m turnover, good internal controls, a sound business structure, and no current or prior problems. The auditor will take approximately three to four weeks of planning, four weeks of fieldwork, and four weeks to prepare reports and disclose the result. However, it can change depending on the business size, the efficiency of the internal record-keeping system, etc.
Now if you are involved in the account preparation side, the auditor can easily collect evidence from your accounts preparation file. It reduces the time gathering evidence to prove the amount and disclosures in your financial statements to the trial balance.
However, first-time audits take longer as auditors must go through the business to understand better and perform audit tasks on the opening balances.
The cost and timing of an audit cannot be determined beforehand; however, you can estimate by speaking with different auditors before hiring them. For certain businesses, it may seem expensive on the top, but you can get a refund on auditor charges if mentioned on the tax return, and they protect you from costly mistakes.