audit lesson 2

Audit Firms Make Money: Charging a Fee for Audit Services

Audit firms make money by charging a fee for audit services billable hours

Audit Firms Make Money: More Billable Hours

Audit firms make employees work more billable hours

Audit Firms Make Money: Fixed Salaries

Audit firms make money by paying employees fixed salaries

Audit Firms Make Money: High Utilization Rate

High utilization rate of employees means more profit for the owners

Reason for Non-Audit Services: Help Auditors

Some non-audit service lines can help auditors when needed

Reason for Non-Audit Services: Why Firms Develop Them

This is why some firms say they develop their non-audit services

Research on Non-Audit Services

Research suggests that non audit services lower audit quality

Audit Firm Organization: LLP or LLC

Audit firms are organized as LLP/LLC’s

LLP/LLC Benefit: Limited Liability

Limits partners liability to the capital they hold in the firm

LLP/LLC Example: Capital at Risk

If Cliff LLP gets sued for $13 million, and Cliff has $3 million in capital while Bar has $4 million in capital, the lawsuit can only take the 7 million in capital at the firm

LLP/LLC Example: Personal Assets Protected

Cliff and Bar also have $10 million in personal assets each, but the lawsuit cannot take the $20 million in personal assets the partners have

Audit Staff and Seniors Reward

Audit staff and seniors are rewarded for their ability to get things done

Audit Managers Reward

Audit managers are rewarded soft skills of managing people

Audit Partners Reward

Audit partners are rewarded for leadership and skills in auditing standards

LLP/LLC Taxes

LLPs/LLCs don’t pay partners’ income taxes

When LLP/LLC Partners Pay Taxes

They only pay taxes when they withdraw their share of the income

Corporation Tax Treatment

While corporations pay income taxes first