How Much Does an Audit Cost? What Drives Audit Fees for Private Companies

"How much will the audit cost?" is usually the first question a business owner asks when a lender, investor or regulator requires audited financial statements. The answer depends on a short list of factors. Audit fees are driven mainly by the hours needed to obtain sufficient appropriate evidence for an opinion, and those hours are driven by the size and complexity of the business, the condition of its books, and the reporting requirements it has to meet.

This guide explains the drivers of audit fees for private companies, how firms set fees, the professional rules that limit fee arrangements, and what management can do to keep the cost down. It is written for both sides of the conversation: CPA firms explaining fees to clients, and controllers and owners preparing for a first audit. It deliberately gives no dollar figures; fees vary too much by region, firm and engagement for a general range to be useful, and the firm's proposal is the only reliable number.

First, is an audit the right service?

An audit provides reasonable assurance and an opinion on the financial statements. A review provides limited assurance, and a compilation provides none. Reviews and compilations generally require fewer procedures and cost less. If the lender or other user will accept a review, ask whether that meets the need. See SSARS: compilation vs review vs audit for the differences.

Also confirm what kind of audit is required. A financial statement audit under GAAS is different from an audit under Government Auditing Standards, a single audit under the Uniform Guidance or an employee benefit plan audit under ERISA, and each adds procedures and reporting. See Yellow Book (GAGAS), nonprofit audit requirements and 401(k) audit requirements.

What drives audit fees

1. Size

Larger entities generally have more transactions, more accounts and larger balances, which means larger populations to test and, often, more locations or systems. Size also affects materiality: the auditor sets materiality relative to a benchmark such as revenue, total assets or pretax income, and lower materiality relative to the volume of activity means more testing. See materiality in auditing and the materiality calculator.

2. Complexity of transactions and accounting

Complex areas take more time and more senior people. Examples include:

• revenue with multiple performance obligations, variable consideration or over-time recognition; see revenue recognition audit procedures
• stock compensation; see ASC 718
• leases; see ASC 842
• income taxes and uncertain tax positions; see ASC 740
• business combinations, goodwill and impairment; see ASC 360 and ASC 350 impairment
• fair value measurements, derivatives and complex debt; see ASC 820
• inventory with standard costing, multiple locations or consignment

Each of these may require an accounting estimate to be audited under AU-C 540, and some require specialists.

3. Readiness of the books

This is the driver management controls most directly, and it can be a large one. Signs of an audit-ready client:

• every balance sheet account reconciled to the general ledger, with support
• the year-end close completed before fieldwork, with no major entries posted during the audit
• schedules provided on time, in the format requested, and tying to the trial balance
• documentation for estimates, such as the allowance for credit losses and inventory reserves
• few audit adjustments

When the books are not ready, the audit team ends up doing accounting work, waiting for information or reworking procedures after balances change. That time adds to the fee, and it can also raise independence questions if the firm ends up preparing records for the client. See the month-end close checklist.

4. Internal control

The auditor's risk assessment considers the entity's system of internal control. Weak controls, limited segregation of duties and frequent manual entries increase assessed risk, which increases the extent of substantive testing. Where controls are well designed and operating, the auditor may be able to test and rely on them for some assertions, though for many small entities a mostly substantive approach is more efficient. See substantive testing vs tests of controls and the audit risk model.

5. Industry

Some industries carry specialized accounting, regulation or risk: construction contractors, not-for-profits with restricted contributions and grants, healthcare, financial services, and entities subject to government funding requirements. Industry knowledge reduces the hours needed, but the specialized procedures still have to be performed.

6. Number of entities and locations

Consolidated groups require work on the components the risk assessment identifies, plus intercompany eliminations and consolidation. Multiple locations may require inventory observations or site visits at more than one place. Foreign subsidiaries add currency translation and possibly work by other auditors under AU-C 600.

7. First-year audits

A first-year audit requires procedures on opening balances under AU-C 510, which may include reviewing the predecessor auditor's working papers or, if the prior year was not audited, additional procedures on beginning balances such as inventory and fixed assets. The firm also has to document its understanding of the entity and its controls from scratch. First-year fees are usually higher than later years for the same scope.

8. Reporting requirements and deadlines

Additional reports, such as Government Auditing Standards reports, single audit reports, compliance letters for lenders or regulatory filings, add procedures. Tight deadlines can add cost when they require more staff at a busy time of year. Off-season fiscal year ends or flexible timing can work in the client's favor.

9. Risk and quality expectations

Firms consider engagement risk: users of the statements, going concern questions, past restatements, litigation, and the quality of management's responses. Engagements with heightened public interest call for more documentation and review, including an engagement quality review where firm policy requires one.

How firms set audit fees

Firms usually estimate hours by area and staff level, apply rates, and adjust for risk and the relationship. Fee structures commonly include:

• Fixed fee, with assumptions stated in the engagement letter about the client's readiness and the scope, and a mechanism for additional fees if assumptions are not met
• Hourly, sometimes with an estimate or cap
• Hybrid, with a fixed fee for the base audit and hourly billing for additional services or out-of-scope work

The engagement letter under AU-C 210 sets out the terms of the engagement, and firms commonly describe the fee and its assumptions there. See the audit engagement letter template and audit engagement letters.

Professional rules on audit fees

Fees are not purely commercial. The AICPA Code of Professional Conduct limits certain arrangements:

• Contingent fees are prohibited for an attest client, so a fee for an audit cannot depend on the outcome, such as the amount of a loan obtained or the opinion issued (ET 1.510).
• Unpaid fees can impair independence. Under the unpaid fees interpretation (ET 1.230.010), fees for earlier professional services that are still unpaid when the report is issued can be treated like a loan from the firm to the client and impair independence.
• Fee dependence on a single attest client may create threats to independence that the firm must evaluate under the conceptual framework.
• Nonattest services sold alongside the audit, such as bookkeeping or tax preparation, must meet the general requirements for nonattest services, including management's acceptance of responsibility.

How to reduce the cost of an audit

1. Close the books before fieldwork. Post all adjusting entries management knows about and reconcile every balance sheet account.
2. Use the PBC list. Deliver requested items on the agreed dates and in the agreed format. See the PBC list and the PBC list template.
3. Document estimates and unusual transactions as they happen, with memos on the accounting for significant contracts, financing and acquisitions.
4. Talk to the auditor early about new transactions, accounting changes or new reporting requirements.
5. Assign one coordinator who can answer questions quickly and route requests.
6. Fix recurring adjustments. If the same audit adjustment appears every year, add a step to the close process.
7. Keep scope stable and ask for changes in writing so both sides agree on the effect on the fee.

Frequently asked questions

How much does an audit cost for a small business?

It depends on the size and complexity of the business, the condition of its books, the industry, the number of entities and the reporting requirements. The reliable figure is a written proposal from a CPA firm after it has understood those factors.

Why do audit fees vary so much between firms?

Firms differ in rates, staffing models, industry experience and the way they assess risk. They may also make different assumptions about the client's readiness, so compare the scope and assumptions behind each proposal, not just the total.

Why is a first-year audit more expensive?

The auditor must perform procedures on opening balances under AU-C 510 and build an understanding of the entity and its internal control from scratch. Later years can build on the prior-year file.

Can audit fees be contingent on a loan or outcome?

No. The AICPA Code prohibits contingent fees for attest clients, so an audit fee cannot depend on the result of a transaction or on the audit findings.

What is the most effective way to lower audit fees?

Be ready. Reconciled accounts, a completed close and supporting schedules delivered on time reduce the hours the audit team spends waiting, reworking and doing accounting work.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• AICPA Code of Professional Conduct, ET 1.510 (contingent fees), ET 1.230.010 (unpaid fees), ET 1.295 (nonattest services). pub.aicpa.org
• AICPA, AU-C Section 210, AU-C Section 510, AU-C Section 540, AU-C Section 600
• AICPA, SSARS (AR-C Sections 60, 70, 80, 90) for the compilation, review and audit comparison

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error