Results of Audit Fee Reduction
Introduction
This report will try to identify what changes can be made by the audit firm if a substantial reduction in audit fees is agreed with the client, considering current economic climate. Furthermore it will discuss whether these changes could risk the quality of the audit. The research was carried out in Aldrich library and is based on various research articles, articles in professional magazines and the financial press.
The current economic climate
The current economic climate has got its start in December 2007, when global recession begun and affected the entire world economy. This is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total breakdown from large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world (Reuters, 2011).
All that could not spare accounting industry, where the current environment and audit fee competition has been described as brutal and the most challenging some partners have ever seen. There is a price war raging between accounting firms, which do everything to win the tenders of large listed entities. Unfortunately, according to many financial specialists, recent vast price competition very often damages the quality of audit work.
Changes to be made by the auditing firm where a substantial reduction in audit fee is agreed
One of the first obvious changes undertaken by audit firm if substantial fee reduction is agreed would be to seek efficiencies by cutting the total number of audit hours (Audit Inspection Unit). This reduction would lead to auditors spending less time on-site performing the audit, leading to cutback in substantive testing and evidence gathering. Following that, auditing firms could be forced to apply higher materiality levels, which means that the sizes of samples tested would be reduced. As an example, the member of an audit team
This report will try to identify what changes can be made by the audit firm if a substantial reduction in audit fees is agreed with the client, considering current economic climate. Furthermore it will discuss whether these changes could risk the quality of the audit. The research was carried out in Aldrich library and is based on various research articles, articles in professional magazines and the financial press.
The current economic climate
The current economic climate has got its start in December 2007, when global recession begun and affected the entire world economy. This is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total breakdown from large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world (Reuters, 2011).
All that could not spare accounting industry, where the current environment and audit fee competition has been described as brutal and the most challenging some partners have ever seen. There is a price war raging between accounting firms, which do everything to win the tenders of large listed entities. Unfortunately, according to many financial specialists, recent vast price competition very often damages the quality of audit work.
Changes to be made by the auditing firm where a substantial reduction in audit fee is agreed
One of the first obvious changes undertaken by audit firm if substantial fee reduction is agreed would be to seek efficiencies by cutting the total number of audit hours (Audit Inspection Unit). This reduction would lead to auditors spending less time on-site performing the audit, leading to cutback in substantive testing and evidence gathering. Following that, auditing firms could be forced to apply higher materiality levels, which means that the sizes of samples tested would be reduced. As an example, the member of an audit team
References: Singh, R., 2012. “FRC: Big Four risk swapping quality for quantity in audits” Accountancy Age [online] available at: http://www.accountancyage.com [Accessed 12 August 2012]. Millichamp, A., Taylor, J., 2012