In the current economic environment, there are various reasons why small and medium enterprises (SMEs) would require an audit of their annual financial statements. An audit could be required by law in terms of the Companies Act of South Africa, the company’s memorandum of incorporation, the bank during an application for funding, potential investors, or the regulators in the industry in which that SME operates (or any other legislation).
If an entity requires its financial statements to be audited, the management of that entity must approach a registered auditor for a proposal/quotation. The auditor will subsequently review the entity’s profile, including historical financial information, to assess how long and ultimately how much it will cost to perform such an audit. When determining these costs, the auditor will also take into account the reporting timelines and/or deadlines, as they will have a significant impact on the amount of resources the auditor will have to invest to complete the audit.
In practice, the issue of costs is a very sensitive one, because an auditee wants to be audited at the lowest possible cost while the auditor must perform each audit ensuring that he/she meets certain minimum quality requirements and also complies with the International Standards on Auditing (ISAs).
THE AUDITOR’S PERSPECTIVE
From a legal standpoint in South Africa, only auditors that are registered with the Independent Regulatory Board for Auditors (IRBA) can perform external audits. Registration and membership with the IRBA has its own cost implications for auditors as they are charged a fee upon registering themselves (the individual) and registering their audit firm (the entity). In order to retain their licenses, auditors must continue to pay annual membership fees as well as a percentage of the fees they generated during the year from performing audit engagements to the IRBA.
Professionally, each auditor has a responsibility to perform each audit engagement at the appropriate quality level and to ensure compliance with all relevant auditing standards. An audit that is up to standard or at the right quality level means that the auditor must have properly trained staff, invest in technology (audit software, etc), comply with continuous professional development (CPD) requirements, and also spend the right amount of time on the engagement amongst other things. All of this comes at a hefty cost to the auditor.
On an annual basis, auditors must disclose to the IRBA all the audits they have performed and the IRBA (using their risk-based methodology) will select engagement files for review and inspection. Should the IRBA’s inspection find that an audit engagement performed by the auditor lacks the desired quality, there are serious financial and business continuity risks for the auditor.
THE CLIENT OR AUDITEE’S PERSPECTIVE
The client or the entity being audited, like any other business, would like to keep their operating costs as low as possible. To them, an audit is just another operating cost.
If all that matters is to keep costs low when you go ‘shopping’ for audit services and you only have eyes out for the lowest possible fee, it is likely that you may fall victim to illegitimate, unqualified and/or unregistered accountants claiming that they are able to provide audit services. This may backfire if it is later discovered that your ‘audit was not performed by a registered auditor or was not performed at the right quality and standard. In some instances you may have to redo the audit, which may have serious cost implications. (You can verify registered auditors by visiting www.irba.co.za/find-an-ra.)
If an organisation requires an audit for whatever reason, it is crucial for management to have an understanding of what exactly an audit is, why their organisation requires an audit, and who is qualified to perform such an audit. This will help them draw up a realistic budget and take away any misconceptions that they may have about audits.
Because of the constant pressure to keep costs low, management often fails to see that an audit adds value to the organisation. It can also be a good opportunity to get honest feedback about the functionality of some of the internal controls, as well as the financial state of the organisation.
All things considered, the auditor and the auditee need to find a middle ground on the audit fee, which leads to instances where the audit fee can be negotiable. The audit fee cannot be so low that it poses a significant threat to the quality of the audit. Auditors are also running a business, so their fees must be competitive in the open market.
Tumelo Makgakga CA(SA), RA, Managing Director, FirstPlace Assurance & Advisory