How audit fees are set

Ensuring audit fees are reasonable

The Public Audit Act 2002 gives the Auditor-General (or the Auditor-General’s appointed auditors) the power to charge audit fees. The Act requires that the fees must be reasonable, given:

the nature and extent of the services provided;
the requirements of the Auditor-General’s auditing standards;
the auditor’s qualifications and experience; and
any other matters the Auditor-General considers relevant.

What does "reasonable" mean?

Fees need to be fair to the public organisation as well as providing a fair return to the auditor.

The cost of the audit, time required, and staff needed are determined by:

the complexity, structure, and scale of the organisation;
the nature of issues affecting its operation;
political, operational, or financial risk associated with the public organisation and the sector; and
whether the public organisation is prepared for the audit.

Unlike other audit service providers, Audit New Zealand does not seek profit. Its audit fees are used as a useful benchmark for maintaining reasonable fees for all auditors who do work on the Auditor-General's behalf.

How are audit fees set?

The auditor will first prepare a draft audit fee proposal for negotiation with the public organisation. This proposal usually covers three years of audits, but might cover less time if the public organisation is new or being disestablished.

The Office of the Auditor-General reviews each proposal to give feedback to the auditor about the reasonableness of the fees. The proposal will then be presented to the public organisation and agreed by negotiation. In the rare instances where this can’t be agreed, the Auditor-General can set the fee directly.

Parliament expects public organisations to fully fund the cost of their annual audits.

The audit fee proposal will state what the public organisation needs to provide for the audit. If these expectations are not met, the auditor might ask the Auditor-General to allow additional fees to be negotiated.

Why might there be additional fees?

Additional fees can sometimes be charged in specific situations. This might happen if:

the public organisation has significantly changed the nature of its activity or operations;
the public organisation has failed to meet agreed deadlines or produce documents of an auditable quality, directly resulting in cost increases for the auditor; or
there are significant changes to the nature of the documents that the public organisation is required to have audited.

If the auditor has satisfactorily explained the circumstances to the Office of the Auditor-General, they will then negotiate the additional fees with the public organisation. Auditors will tell the organisation as soon as possible if any of these factors might affect the fees charged.

Audit fees might also be affected by:

increased costs associated with regulating auditors;
changes in financial reporting standards;
salary-driven pressure on charge-out rates;
increased focus on service performance information; and
auditors adjusting audit fees so that they are sustainable.

A levy is also included in the audit fee for related costs incurred by the Office of the Auditor-General. This covers:

developing and maintaining auditing standards;
providing technical support for auditors;
training auditors on specific public sector issues;
preparing sector briefs to ensure a consistent approach to annual audits;
developing and maintaining strategic sector plans; and
carrying out quality assurance reviews of auditors.

How are fees monitored?

The Office of the Auditor-General monitors audit fees by:

reviewing historical audit hours (hours quoted and actual hours spent) to identify patterns;
reviewing proposed audit hours compared with audits of similar organisations in the same sector;
comparing aspects such as revenue, number of staff, and asset value with other audits;
reviewing the proposed audit team; and
reviewing the charge-out rates in the context of the proposed team.

The Office of the Auditor-General tries to ensure that:

fees are based on realistic audit hours that reflect the nature and extent of the work;
the audit team mix is appropriate for the nature of the audit and risk profile; and
charge-out rates are in line with market rates, compared to the rates of other public sector audits.

There's an annual independent review of how the Office of the Auditor-General allocates audits and monitors fees. The reviewer has consistently concluded that fees have been set fairly. Their reports can be read in the Auditor-General’s annual report.

Factors that affect fees

The time it takes to carry out an audit significantly affects audit fees.

Auditors determine the size and scope of audits in keeping with the Auditor-General’s auditing standards, with special attention to known areas of risk. The public organisation can't decide what it wants its auditor to do. But it can ensure that:

the audit proposal clearly describes the reasons for any fee increases;
negotiations with the auditor are objective and focused;
its governance framework and internal controls operate effectively;
the appointed auditor can rely on work by the organisation’s internal auditor; and
it communicates regularly with the appointed auditor about issues that could affect the audit.

A public organisation can also prepare for its audit by:

minimising changes to the pre-agreed arrangements with the auditor, giving advance notice of unavoidable changes;
providing the auditor with all the information required to do the audit on time;
ensuring that its annual report is reviewed internally before the audit; and
ensuring that the financial statements and service performance information are complete and don't need to be changed significantly during the audit.

Auditors are expected to:

plan well, manage the audit team well, and carry out the audit as planned;
ensure enough continuity of audit team members between and during audits;
ensure that the team is well briefed and knowledgeable about the public organisation being audited; and
ensure that they communicate regularly with the organisation.

Page last updated: 2 March 2023