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Audit of financials – nuts and bolts

All companies incorporated under the Hong Kong Companies Ordinance must engage an independent auditor to examine their annual financial statements before such statements are given to tax authority and their members.  Many business owners think that an audit is just one of the general costs of running the business.  Hence, they try to minimize it.  How wise is it?

Generally speaking, a report given out has its own value.  In giving out their report, the auditor must have done the following:

1/ Make sure they are independent in fact and in appearance.

2/ Make sure there kept proper accounting records in arriving at the financials.

3/ At planning stage, assess the risks and design an audit strategy.  This involves review of financials, systems, projections and other available documents, understanding of business and management and research on the industry and their related regulatory matters.

4/ Carry out all way testings to systems, transactions and balances by observation, re-performance and checking the underlying supporting evidence in support of the figures and disclosures in the financials, etc.

5/ Review of events, transactions and records for the next financial year.

6/ Gathering all the relevant evidences obtained and make sure they are sufficient to provide a basis for audit opinion.

7/ Make sure the financial statements are properly drawn up and all disclosures are adequately included there in accordance with the acceptable reporting standards.

Wiser managers appreciate lower auditor’s charge usually builds on how tactful the auditor gets through the above works, such as getting “relevant” evidences instead of those irrelevant ones. However, the basic steps mentioned above involve skillful labour costs whose minimum is not as low as few thousands.

Let’s work out how it looks like.  Presuming the labour cost of auditor who could finish 2 smaller assignments in a week is as low as HK$20,000/month.  A multiple of 3 is used to reflect office rent, administration and reviewer costs.  A reasonable fee charge is likely to be HK$7,500 (i.e. HK$20,000 x 3 x 1/8) for each smaller assignment, irrespective of income levels.  Of course, the multiple being used could be smaller or bigger in different firms which make divergent fee level for the same company.  Too low the fee may imply the use of less skillful staff which could affect the standard of work.

Nevertheless, auditors’ fee may be pre-agreed to be lower to maintain a harmonious working relationship.