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 would spend 10 hours counting inventory, even though it has been established that 16 hours is needed. Following change would involve alterations in audit team personnel, including delegation of large amount of work to junior staff. It is rather risky decision as adequate senior staff level while undertaking audit job should always be priority. Unfortunately fee reduction could probably lead to fewer experienced professionals and partners to be around. Allocating some important tasks to junior members of the team could undermine the quality of an audit as there would be a significant risk of certain material misstatements or frauds being undetected. It is very important that less experienced staff should always be guided and supervised by senior staff members. Cutting the total number of audit hours and alterations in audit team personnel would result in increased use of checklist and other efficiency measures during auditing activities. One needs to remember that checklists are valuable auditor’s tool – but they can be restrictive if used as the auditor's only support mechanism. The biggest risk is that an inexperience auditor may not be able to clearly communicate what he is looking for, if they depend too heavily on a checklist to guide their questions. Again that is the area where junior staff has to be supervised by senior level auditors as cutting the costs here could actually lead to longer or more complicated audit. Substantial reduction in audit fee can be very challenging and sometimes even destructive to the audit firm. That is why it is vital that audit partners guide and always offer help to their auditing teams. Fairly often audit client’s management tends to provide as less information as possible to their auditors - the audit teams should always challenge the amount of information. If more sufficient evidence will be gathered there is better assurance for users of the report. In these difficult times professional skepticism should be exercised...