European Journal of Accounting, Auditing and Finance Research (EJAAFR)

EA Journals

Detection Risk

Relation between Audit Risk and Audit Fees – Evidence from Listed Firms in the Us (Published)

This study analyses association between audit risk and audit fees and also studied the influences of industry differences on audit pricing-risk association. Strong empirical evidence has found to suggest that the inherent risk and control risk have positive influence on audit fees. The sample of empirical research comprises a total of 507 listed companies, 260 observations in the United States in 2007 fiscal year and separated into two sub-samples, financial and non-financial firms. Client financial distress factor was tested with the help of Z-score model. The analysis shows that in the similar level of total assets financials are charged lower audit fees than non-financial firms and compared with financials, the audit fees for nonfinancial firms are more sensitive to the financial indicators. It also concluded that the auditors did not seem to take financial firms business risk into consideration when decided audit fees as there is a positive relation between audit fees and companies’ solvency and the possibility of bankruptcy. Auditors considered not only the non-financial firms’ profitability, but also the liquidity, activity, solvency and possibility of bankrupt when they decide audit fees.

Keywords: Audit Fees, Audit Risk, Control Risk, Detection Risk, Inherent Risk, Non-financial firms

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