THESE FACTORS DRIVE UP AUDIT COSTS
Small companies spend a higher % of their profits on audit than big companies. Relatively speaking, an audit is more expensive for smaller and medium sized companies. There are some reasons to this.
This is a political question; different countries have different laws for when a small company crosses a certain threshold and must be audited (see list here). Small companies that just passed over the threshold can therefore be in a stage where the audit cost is relatively high if measured in % of profits.
A Master thesis (in Norwegian) also addressed this in 2009, showing how low revenue companies paid disproportionally much in audit fees compared to high-revenue companies. Economies of scale is a natural explanation for this. Obviously, auditors cannot and should not, work for free or with a loss. Audit is an important profession, and it needs to attract good people to do the job – an auditor is a person that is trusted by the public.
Policies might be difficult to change, and the threshold needs to be set at some level anyways. It seems only new technology can come to the rescue here. Keep reading and I will propose a solution that can help both SME’s and auditors.
NATURE & SCOPE
Some businesses are quicker to audit than others. Activities with high risk for misstatements in the financial statements probably need more investigation by an auditor. However, companies can help out by providing high quality documentation.
QUALITY OF DOCUMENTATION
The quality can vary from contracts scribbled on napkins to electronical signed documents. If the documentation is in paper form, it takes longer time to retrieve the information, and data would be too time-consuming to extract and analyze. Scanned papers might feel like it’s digitalized and retrieval might be speedier, but if data cannot be easily extracted and verified there is still room for improvement.