As any experienced auditor knows, first-year audits are always a challenge, and they often result in profitability issues. But why does this happen, and how can you avoid it? The answer lies in asking the right questions when pricing your financial statement audit. Often we ask questions about the business itself (i.e. how many locations do you have or what are the key estimates). We often miss the most important questions to discover the dreadful time sinks in the audit. These black holes of lost time can often prevent the audit from meeting the firm's profitability metrics and transform it into a highly unprofitable audit. In this blog post, we'll explore the three most critical questions you need to ask your client before you agree to a fee to ensure that your audit is not only profitable but also a success for your clients.
The first question you should ask your client is what accounting software they are currently using and whether or not it's cloud-based. With the rise of cloud technology, it's critical to understand if your client is using a system that allows for third-party apps to connect easily. By being able to connect to third party apps, data extraction can be a breeze. Your initial PBC list can almost be entirely eliminated. The older and more outdated the system, the more time your team will spend helping your client find the data you need to complete the audit or time spent waiting on the client to provide the request. This time helping and waiting is almost never a part of the audit budget and will instantly eat into your audit margin.
In 2023, the use of the latest technology can literally eliminate 80 - 90% of testing certain account balance at your client. This can only be done though if your client is cooperative. This may include having them to connect their accounting system, or electronically authorizing confirmations. We find often your clients will be hesitant to try new things and the default answer will be ‘No.’ This is because clients may not be aware of the benefits of these advanced tools, so it's your job to educate them in the proposal process. By setting this tone from day one, you will be able to eliminate hours otherwise spent on doing things "the old-fashioned way". If your client insists on using old methods, just make sure you adjust your price to make up for this time.
Timing is critical when it comes to audits, and preparation is king. You must ensure that your client's staff is committed to being prepared in advance of the audit. Are they willing to commit to providing 80% of the initial PBC requests before fieldwork even starts? Commitment to being audit-ready saves a lot of time and effort, versus fading in and out, which causes delays that will ultimately impact your profitability. It's essential to set expectations for what is required from both parties and stick to the timeline. If either party defaults on their duties, what are the penalties? Will this delay the audit fieldwork? Does this mean the client will incur additional bill(s)? Holding these conversations up front and having a carrot (the audit is easier) and a stick (increase in fee) can help remove the wasted hours spent sending the client follow up emails like “ Hi Are you ready? or “ I noticed you haven't provided me with the PBCs yet.”
Asking the correct questions when preparing a financial statement audit proposal will save time, energy, and money while promoting long-term success for your firm and your relationship with the client. Asking these three critical questions will enable you to provide a more accurate pricing estimate while educating your client on the importance of using the right tools and setting expectations on the audit process with your firm. By setting clear expectations, you not only mitigate the risk of profitability issues, but you also establish a more comprehensive relationship with your client from day one. While these questions may seem uncomfortable at first, they will become a natural after a few reps. Plus it’s better to ask these questions up front rather than sending an extra bill at the end of the audit or having to explain why this audit was unprofitable to your managing partner.
At Audit Sight we eliminate work by doing the test of details. We have a certain number of tests that can be run on any client like a proof of cash or an audit confirmation. We can also connect to certain cloud based accounting systems reducing the number of PBC items.
Happy Auditing,
Audit Sight Team
