The National Metal Works Limited manufactures and retails door and window frames. The company recently dismissed their external auditors. The directors have approached your firm of accountants to act as their auditors and the directors have proposed a fee of KShs. 1, 000, 000 plus a bonus of 1% of profits after tax. Required: State with reason whether professional auditors should accept the method of remuneration as proposed by the directors of the client company

The fee charged by auditors should be based on the time taken and the seniority of the staff involved, taking into account the costs of the auditors practice overall. Normally, hourly rates of charge are used which will vary according to the complexity of the work and the level of responsibility assumed by the practice in relation to the work.

The use of a contingency fee or percentage basis for calculating the fee is not acceptable for normal audit work. In this case, the auditor‘s independence could be impaired by the use of a percentage of profits after taxation as a bonus, as it could tend to discourage the auditors from proposing adjustments that reduced the profit figure. The fixed £100,000 would be acceptable if the auditors were satisfied that it was reasonable in relation to the time taken and staff employed in carrying out the audit work.

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