Wednesday, July 16, 2014

Reasonableness test of licence fee

You audit client may be in regulated industries or providing services that are tightly regulated. In this intance, there are chances whereby the audit client is required to pay certain licence fee for the right to operate within that industry or the right to provide such service.

It is important for the auditor to review the agreement to review that allowable services to be provided by your audit client and whether if the licence has expired. This is to help to identify any non-compliance with the rules.

More often than not, your audit client is required to pay certain license fee - which could be based on certain % of revenue , specific rates for certain volume, etc.

Audit client must maintain a process to track the recording of these activities to ensure that the transactions recorded are complete. We, as auditor, also need to review the process in place to check that there is a robust process to ensure the completeness of these transactions. We also need to review the reasonableness of the license fee payable computed to test that the amount is not materially different for audit purpose.

A comparison of current year licence fee payable and prior year licence fee payable could help to identify fluctuation or absence of fluctuation that are expected.


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