Audit fees are a common expense for businesses of all sizes. These fees are paid to an independent auditor to review a company’s financial statements and express an opinion on their fairness and accuracy. The timing of when to recognize audit fees as an expense can be a complex issue, and there are different schools of thought on the matter. This article will explore the key considerations related to accruing audit fees and provide guidance on the appropriate accounting treatment.
FASB’s Accrual Accounting Principle
According to the Financial Accounting Standards Board (FASB), the goal of accrual accounting is to “match expenses with the revenues they generate and to record liabilities when incurred, even if the cash outlay is not made until a later date.” This principle suggests that audit fees should be recognized as an expense in the period in which the audit services are performed, regardless of when the fees are actually paid.
AICPA’s Technical Practice Aid
The American Institute of Certified Public Accountants (AICPA) has issued Technical Practice Aid 5290.05, which provides guidance on accounting for audit fees. This guidance states that “the audit fee expense was incurred in the period subsequent to year end. Therefore, it is properly recorded as an expense in the subsequent period.”
Alternative Treatment for Preliminary Audit Work
However, the AICPA’s guidance also acknowledges that certain audit fees may be incurred prior to the end of the fiscal year under audit. These fees, such as those related to planning the audit and performing preliminary procedures, should be accrued as an expense of the year under audit.
Matching Principle vs. Cash Basis Accounting
The decision of whether to accrue audit fees is often influenced by the matching principle versus cash basis accounting. Under the matching principle, expenses are recognized in the period in which they are incurred, even if the cash outlay occurs in a different period. On the other hand, cash basis accounting only recognizes expenses when cash is actually paid.
Consistency and Materiality
When considering the timing of audit fee recognition, it is important to maintain consistency in accounting practices from period to period. Additionally, the materiality of the audit fees should be taken into account. If the fees are immaterial, it may not be necessary to accrue them until the cash payment is made.
The timing of audit fee recognition depends on several factors, including the FASB’s accrual accounting principle, the AICPA’s guidance, the matching principle, and the materiality of the fees. By carefully considering these factors, businesses can ensure that audit fees are accounted for in a manner that accurately reflects their financial position and operating results.
Additional Considerations
- Billing Schedule: The billing schedule agreed upon with the auditor can influence the timing of audit fee recognition.
- Interim Fieldwork: If interim fieldwork is performed prior to the end of the fiscal year, the related fees should be accrued as an expense of that year.
- Professional Judgment: Ultimately, the decision of whether to accrue audit fees is a matter of professional judgment, taking into account all relevant factors.
Frequently Asked Questions
- When should audit fees be accrued?
Audit fees should generally be accrued in the period in which the audit services are performed, regardless of when the fees are paid.
- What are the exceptions to the general rule?
Fees related to planning the audit and performing preliminary procedures can be accrued as an expense of the year under audit.
- How does the matching principle apply to audit fees?
The matching principle suggests that audit fees should be recognized as an expense in the period in which they are incurred, even if the cash outlay occurs in a different period.
- What is the AICPA’s guidance on accounting for audit fees?
The AICPA’s Technical Practice Aid 5290.05 states that audit fees should be recognized as an expense in the period subsequent to year end, except for fees related to preliminary audit work.
- Is it acceptable to use cash basis accounting for audit fees?
Cash basis accounting can be used for audit fees, but it is not the preferred method under accrual accounting principles.
SIMPLIFIED APPROACH TO AUDIT ACCRUALS: Audit of Accrued Expenses
FAQ
Is audit fee an accrual or provision?
Is it mandatory to make provision for audit fees?
Is audit fees an expense?
What is a reasonable audit fee?
When should audit fees be accrued?
The year under review. Accrue it as with other expenses. Audit fees should be accrued in the period in which the work is performed.
How much does an audit cost?
Average audit-related fees increased to $239,000. Average tax fees decreased to $203,000, the lowest point since 2014, aligning with the lower overall amount paid in tax fees. The average amount of fees classified as “other” remained stable. Impacts on audit work from the COVID-19 pandemic.
How often do external auditors accrue fees?
In discussing with our external auditors, the feedback I got was about 2/3’s of their clients accrued the fees at the year end date (typically building a periodic accrual throughout the year), for audits taking place after the year end being reported. About 1/3 of clients expensed as incurred. My point of reference goes up to fye 2002.
Are audit fees deductible?
In Revenue Ruling 2007-3, the IRS held that in this type of common arrangement, the accrued audit fee would not be deductible during the year of the accrual, because the fact of the liability was not yet fixed. This is because the audit services will not be provided until the following year, nor will payment come due until the following year.