Companies tendering an audit for the first time are usually surprised by the spread. Three firms look at the same business and quote figures that differ by a factor of two or three. The instinct is to assume someone is either gouging or cutting corners. Usually neither is true. The quotes are for different amounts of work.
What actually drives the number
Materiality. This is the single biggest driver and almost nobody asks about it. Materiality determines the threshold above which a misstatement matters, and therefore how much testing is done. An auditor who sets materiality at 5% of profit before tax will do considerably less work than one who sets it at 2%. Both can be defensible. They produce very different fees.
The quality of your records. Auditors price on an assumption about what they will find. If reconciliations are done monthly and reviewed, if the trial balance agrees to the ledger, if last year’s adjustments were posted, the work is faster. If the auditor has to build the reconciliation before testing it, the work is slower and the fee reflects that. Some firms price optimistically and recover later through overruns.
Risk areas. Revenue recognition on long contracts, inventory valued on a standard cost that has drifted, significant estimates, a related party structure, going concern with covenant pressure. Each of these attracts disproportionate effort because they are where misstatements hide.
Group structure. How many components are in scope, whether they are audited by the same firm, and how much work the group auditor must do on components audited elsewhere. Groups are where fee estimates most often go wrong.
Timing. An audit fitted around your requested deadline in the middle of everyone else’s busy season costs more than one scheduled at a quieter time. If your year end is 31 December, you are competing with every other 31 December year end for the same weeks.
What you control
More than you might think.
Deliver the PBC list complete and on time. Nothing else you do saves as much money. An auditor working through a complete file works in continuous blocks. An auditor chasing information starts and stops, and re-familiarises each time.
Keep the file through the year. Reconciliations done monthly, contracts filed centrally, a note of significant judgements written while they are fresh. Reconstructing all of this in the audit window is expensive and it is your time being spent as well as theirs.
Sort last year’s points. If the management letter said your stock counting procedure was weak and nothing changed, the auditor does more work on stock this year.
Move your year end. Not always practical, but if your year end sits in the busiest period and your business is not seasonal, a different date can genuinely reduce fee.
Name a second contact. Audits stall when the only person who knows where things are is unavailable.
How to compare quotes properly
Ignore the headline number until you have asked four things.
What materiality have you assumed, and on what basis? A firm that will not answer this is not comparing like with like with anyone.
What have you assumed about our records? This flushes out optimistic pricing. Ask directly what would cause an overrun.
What is included and what is extra? Statutory accounts preparation, tax computations, group reporting packs, subsidiary audits, and questions during the year are all sometimes in and sometimes out.
Who is doing the work? A fee that looks good because the engagement is staffed almost entirely by juniors is not a saving if the file then needs rework and your team answers the same question three times.
On low fees
There is a version of a low audit fee that is genuinely good value: a firm with low overheads, experienced staff who work efficiently, and a methodology that focuses effort where the risk is. There is another version that is a loss leader, recovered through overruns, or delivered by cutting work that should have been done.
You can usually tell them apart by asking what the firm will do differently to work efficiently. A good answer describes method: full population testing where the data allows it, early planning, a partner who scopes properly. A weak answer talks only about being competitive.
The uncomfortable truth about fee pressure
Audit is a regulated activity with a minimum amount of work that must be done. A firm that wins on price and then discovers the job is bigger than quoted has three options: absorb it, bill for it, or do less. The first is unsustainable, the second creates the argument you were trying to avoid, and the third is the one that ends up in front of a regulator.
Ask for a fixed fee, by all means. Then satisfy yourself that the firm quoting it understands your business well enough for the number to be real.