Audit Effort and Market-perceived Risk: Evidence from South Korea

Sung Hwan Jung

Australian Accounting Review, 2016, vol. 26, issue 3, 255-270

Abstract: type="main">

Auditors incur a loss of credibility and/or status or litigation costs only when investors recognise audit failures. In this respect, auditors may be concerned about an increase in market-perceived risk even though the total amount of audit risk is constant. Consistent with this reasoning, I find that auditors increase audit effort in response to increases in market-perceived information risk. This suggests that the expected costs of audit failures are a function of investors’ recognition, and thus increased market-perceived risk causes auditors to become more concerned about their audit failures and to increase audit effort. Further, this study shows that audit effort is effective in reducing market-perceived information risk, suggesting that auditors contribute to the information environment.

Date: 2016
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