The Effects of Business Risk on Audit Pricing

John Morgan and Phillip Stocken
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John Morgan: Princeton University
Phillip Stocken: University of Pennsylvania

Review of Accounting Studies, 1998, vol. 3, issue 4, No 3, 365-385

Abstract: Abstract 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 do 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.

Keywords: High Risk; Period Model; Risk Type; Risk Firm; Business Risk (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1023/A:1009687101871

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