The Importance of Business Risk in Setting Audit Fees PDF Download
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Author: Michael W. Maher
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Previous research provides evidence that, for the clients of a large audit firm, audit clients with higher perceived business risk bear the expected costs of this risk with higher audit fees. We extend the literature, which focuses on the relation between litigation risk and audit fees, by examining alleged client misconduct that is not illegal but possibly increases business risk. In particular, we examine the relation between audit fees and business risk for audit clients doing business in developing countries where bribery of top government officials has been accepted business practice. We hypothesize that bribery-paying clients are riskier both because of client business risk and audit business risk. Using data collected from SEC filings and audit fee data in the 1970s, prior to the passage of the Foreign Corrupt Practices Act, we provide evidence that audit fees were higher for clients that disclosed paying bribes. This evidence is consistent with an audit market where auditors assess business risk at the client level, then pass its expected costs to the client in the form of higher audit fees.
Author: Michael W. Maher
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Previous research provides evidence that, for the clients of a large audit firm, audit clients with higher perceived business risk bear the expected costs of this risk with higher audit fees. We extend the literature, which focuses on the relation between litigation risk and audit fees, by examining alleged client misconduct that is not illegal but possibly increases business risk. In particular, we examine the relation between audit fees and business risk for audit clients doing business in developing countries where bribery of top government officials has been accepted business practice. We hypothesize that bribery-paying clients are riskier both because of client business risk and audit business risk. Using data collected from SEC filings and audit fee data in the 1970s, prior to the passage of the Foreign Corrupt Practices Act, we provide evidence that audit fees were higher for clients that disclosed paying bribes. This evidence is consistent with an audit market where auditors assess business risk at the client level, then pass its expected costs to the client in the form of higher audit fees.
Author: Richard W. Houston
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
In this study, we develop and test a framework suggesting that auditors consider three sources of business risk when setting audit fees: (1) the level of audit investment and residual (acceptable) audit risk, (2) litigation exposure unrelated to audit risk, and (3) residual business risk. Residual business risk includes all risks and/or opportunities associated with the audit not captured by sources (1) and (2). We test the framework through an experiment with audit partners and managers. The results support the framework and suggest that audit fees reflect the different roles that auditors assume: auditor, insurer, and businessperson. We also discuss how researchers can apply the framework, especially residual business risk, to clarify some unresolved issues regarding audit fees and current issues faced by the audit profession.
Author: Larry Rittenberg
Publisher: Cengage Learning
ISBN: 9780324375589
Category : Business & Economics
Languages : en
Pages : 864
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Book Description
Gain the thorough understanding of today's auditing process with the hands-on practice that's critical for your business success with AUDITING: A BUSINESS RISK APPROACH, 6th Edition. This book introduces the audit process within the context of business risk--teaching you why it is important to first understand the organization's business environment and how you can apply the risk model. An emphasis on the integrated audit in this edition guides you through how to perform it effectively as well as what decisions and management commitments are necessary to complete it. You gain first-hand experience in using the well-known professional ACL Audit software, which accompanies each new book, as you practice audit techniques and work with specialized cases. AUDITING, 6th Edition prepares you to succeed amidst today's numerous auditing changes with the latest look at audit regulations, concepts, and practices as they apply in today's technological, systems-oriented environment. Important Notice: Media content referenced within the product description or the product text may not be available in the ebook version.
Author: Larry Rittenberg
Publisher: Cengage Learning
ISBN: 9780538476232
Category : Business & Economics
Languages : en
Pages : 1056
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Book Description
The auditing environment continues to change in dramatic ways, and new professionals must be prepared for a high standard of responsibility. Prepare your students for these changes by using Rittenberg/Johnstone/Gramling’s AUDITING: A BUSINESS RISK APPROACH, 8th EDITION. AUDITING 8e explains the importance of understanding business risk, internal controls, and the professional judgment processes. In addition, it focuses more than ever on international audit standards and includes a renewed emphasis on professional skepticism, the review process, and sustainability audits. In addition, students will gain valuable experience by using the professional ACL auditing software, packaged with each new text, as they work with fraud cases. AUDITING 8e helps your students understand the full range of auditing issues in the new global environment. Important Notice: Media content referenced within the product description or the product text may not be available in the ebook version.
Author: William Kim
Publisher:
ISBN:
Category : Accounting engagements
Languages : en
Pages : 168
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Book Description
This study examines whether audit fee disclosures can provide information about engagement risk. Furthermore, it examines whether auditors can analyse engagement risk related to the audit work performed beyond the present accounting period. Based on Stanley (2011), I investigate the relationship between the present levels of audit fees charged to the client and both the current and one year change across engagement risk. Drawing on Simunic’s (1980) model and prior research, this study hypothesizes a positive relationship between engagement risk and audit fees. The results indicate that the current level of engagement risk is positively related to the present level of audit fee charged. However the relationship between audit fee and change across one year in engagement risk is mixed. From the initial test, the results indicate that, while the one year change across operating performance arm of the business risk is significantly related to the audit fee, solvency risk in comparison is mispriced by the auditor. My original results are, thus, inconsistent with the notion where the audit fee is priced based on risk at multiple levels. Furthermore, audit risk and its subpart internal control risk is not significantly related to audit fee. However, from the additional test where alternative measure for audit risk is incorporated into the model, other than the solvency risk arm of the engagement risk, the results indicate a significant relationship between both current and one year change in engagement risk and audit fee. Furthermore, upon testing the relationship between audit fee and both current and one year change in bankruptcy level of the client, the result indicate that the bankruptcy risk is correctly identified and priced for by the auditors. Overall, auditors, when charging audit fees to their clients, consider risk in a wider context. Although my results are mixed the additional results provide support for the view that audit fees are related to risk in a wider context beyond business risk and across time.
Author: Phillip C. Stocken
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper examines the pricing of business risk by homogeneous auditors in a two period model. Incumbent auditors learn the client?s business risk type during the course of the engagement. They subsequently compete in prices with prospective auditors. In such an environment, we show that equilibrium audit fees to not fully reflect the cost of business risk. Moreover, there exists differential auditor turnover between high and low risk firms; cross-subsidization of the audit fees of high risk firms by low risk firms; and low-balling by auditors.
Author: Tharindra Ranasinghe
Publisher:
ISBN:
Category :
Languages : en
Pages : 44
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Book Description
Although prior literature has documented a positive association between business risk and audit fees, it remains unclear whether, in addition to expending greater audit effort on riskier clients, auditors also charge a risk premium. This is an important issue because a risk premium is a deadweight loss. We examine this issue in the context of hedging derivative usage in the U.S. oil and gas exploration and production industry. While derivative hedging reduces business risk, the auditing of derivative instruments requires greater auditor effort. Consistent with the existence of a risk premium in audit fees, we find a negative relationship between the extent of hedging and audit fees. This relationship is weaker when the derivative instruments held by firms are less effective in offsetting the underlying risks and when internal control weaknesses prompt auditors to increase their efforts on auditing of derivative instruments. We contribute to the literature by documenting a deadweight component in audit fees that is unrelated to audit quality.
Author: Lasse Niemi
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
We examine the effect of changes in audit risk standards on the conduct of financial statement audits in a European setting. We investigate this by analysing the audit hours and audit fees for clients of Big 4 audit firms in Finland in 1996 and 2010. Our results show that audit firms became more sensitive to clients' business risk due to the introduction of the new audit risk standards, with more audit hours allocated to owner-managed companies in 2010 than in 1996, and fewer audit hours allocated to low-risk clients in 2010 than in 1996. Also, the labour mix in the audit team changed for owner-managed companies, with a greater work load carried by junior auditors in 2010 than in 1996. Regarding the price of audit, we find an increase in audit fees for clients with high business risk while audit fees remained at roughly the same level for low-risk clients. These findings should be of interest to the auditing profession and those involved in the development of auditing regulations.
Author: Jonathan D. Stanley
Publisher:
ISBN:
Category :
Languages : en
Pages : 166
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Book Description
Author: Christian Haehl
Publisher:
ISBN:
Category :
Languages : en
Pages :
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