Are All Audits Created Equal?
By Edmund Cartwright, Auditor, Johnsons Chartered Accountants
In part four of our blog series on Assurance and Audit, we consider the difference between the Audits carried out by the Top 4 Accountancy firms, and small to medium firms such as Johnsons Chartered Accountants Ealing. Large Accountancy and Audit firms in the UK seem to feature in the press on an almost daily basis – and not always in a positive light. The fines and reprimands serve to erode confidence in the audit process, but not all firms should be tarred with the same brush.
Top 4 Firm Of Auditors vs Johnsons Chartered Accountants
We know from recent experience that the Top 4 Audit firms typically charge six or seven times the fees of a small to medium audit firm such as Johnsons. They engage large numbers of graduates for audit work, whom they charge out at rates equivalent to a Partner in a smaller practice. On the basis of this cost to knowledge ratio, they sometimes represent poor value for money.
Johnsons employs a team of 10 seasoned audit professionals with a wealth of experience. We auditors have worked with large businesses such as Apple, Fit Bit, Fujifilm, Kuoni, Sharp, Aon Insurance and many smaller entities, including farms, charities and associations. We also have experience across a variety of sectors including manufacturing, rights owners, property, and service and technology businesses.
We enjoy getting to know our customers and their businesses and add value at every opportunity.
How Do Audits Vary?
Auditing should be a process of testing a sample of documents and transactions that represent the population of the figures that are being examined. Auditors are trained to select something fairly representative of the whole, and any errors found are indicative of the overall accuracy of the company’s figures.
The Top 4 Audit firms rely on testing internal controls as part of their Audit opinion. Controls – essentially processes and procedures – are easy to document, but there is little concrete proof that they are adhered to consistently or correctly. In addition, the Top 4 Audit firms largely perform Audits on entities with such a huge volume of transactions, that a reasonable sample size could never be processed in a realistic time frame. So the extremely small sample size does not usually reflect the whole. This weakness in the Audit system for very large entities produces the type of problems we see so often in the press.
Take as a brief example a business such as Amazon. Amazon processes 66,000 orders per hour – 578M transactions/year. What kind of sample would a typical Auditor take on a business of this size – probably around 100 – 300 transactions, which is not a large enough sample to be representative.
As a medium-sized firm we rely on substantive testing, which is a detailed test where we go back to original documentation. We select samples that regularly cover up to 60% of some balance sheet balances. There is not an focus based on percentage covered. We select the transactions based on our judgement of what would be a fair representation of the population and give “reasonable assurance”. We always drawing on the experience of our individual auditors, bringing rigour and structure to our audits.
The Future of Audits?
We have to accept that new software tools and AI solutions are the only answer for the giant global entities that require a robust and representative audit. Software might do some of the legwork of proper substantive testing, however the results will still have to be examined by a flesh and blood auditor with many years of experience, who is trained to pick up the warning signs and nuances that flag up errors and further areas for exploration.
At the moment, it is difficult to get the same quality of testing for large organisations that we can provide to small and medium sized businesses. Our clients are usually UK-based, but they are often owned by large global groups, or those with substantial activity overseas.
For each Audit we provide an independent team upon whom you can rely to provide you with the comprehensive service you need in this complex area of accountancy practice. Our clients often find our innovative and risk-based approach reassuring in its simplicity, limiting the diversion of the client’s finance team on unnecessary audit matters. And remember, our extensive expertise comes at an excellent price point!
Contact us to discuss the difference between Johnsons and a Top 4 Audit Firm ourselves
Click here to read part five of this blog series that challenges you to Put Your Audit Firm To The Test.
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