Accounting for Audit Fees
Audit fees are the expenses that company spends to hire the consulting firm to audit their financial statements. Most of the company engage the audit firm to review and issue opinions for their financial statements at the year-end. In exchange for the service, those firms will charge the audit fees to the companies.
Audit fees are the expenses that company needs to spend to receive the audit service. It is the revenue for audit firms. In this article, we will focus on the accounting treatment of audit fees for companies that consume the auditing service.
The company needs to record audit fees as expenses in the current accounting period which matches with accounting principles.
Audit Fees Journal Entry
The company needs to record audit expenses in the accounting period. However, some auditors will start works and bill invoices after the year-end. So the company needs to estimate audit fees and accrue expenses before year-end to prevent understate expenses. Even audit serivice incurr in next accounting peirod, but it must be record as expense in the current period.
The company can accrue audit fees by making the following journal entry debit audit fees account and credit accrue liabilities
Audit Fees Example
Company ABC always hire auditors to audit the financial statement as it is a legal requirement. On 31 Dec 202X, the company not yet receive an invoice from the auditor regarding the audit fee. However, management estimates that the audit fee is around $ 5,000 base on last year’s amount.
The company needs to record audit fees expense as it is the expense in the year 202X even the audit work start in 202X+1. They can estimate to record by debiting audit fees expense $ 5,000 and credit accrued liabilities $ 5,000.
On Mar 202X+1, auditors agree to charge $ 6,000 and management agrees with the fees. So audit fees record in 202X is understated, so we need to record additional expenses.
Company can make a journal entry by debiting Audit Fees Expense $ 1,000 and credit accounts payable $ 1,000. At the same time, we need to reclass the accrued liabilities to accounts payable as we know the exact amount.
The additional $ 1,000 of audit fees will impact the 2020X+1 financial statement as it is the accounting estimate. The reclass of accrued liabilities to accounts payable will not impact the income statement.