Abstract

http://ssrn.com/abstract=1788871
 
 

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The Impact of Legal Liability Regimes and Differential Client Risk on Client Acceptance, Audit Pricing, and Audit Effort Decisions


Audrey A. Gramling


Colorado State University

Jeffrey W. Schatzberg


University of Arizona - Department of Accounting

Andrew Bailey


affiliation not provided to SSRN

Hao Zhang


City University of Hong Kong

1998

Journal of Accounting, Auditing and Finance, Vol. 13, 1998

Abstract:     
This study uses experimental methods to examine client acceptance, auditor pricing and effort decisions for clients of varying risk under two legal rules, joint and several liability, and proportionate liability. We predict greater availability of audit services for high-risk clients, lower audit prices, and lower audit effort under proportionate liability relative to joint and several liability. Our experimental evidence does not strongly support predicted prices due to underpricing behavior, but prices do reflect risk differences across client groups for both liability regimes. The results also exhibit some support for the predictions that auditors select low effort for the lowest-risk clients, and a lower effort level under proportionate liability relative to joint and several liability for moderate risk clients. As predicted for the highest-risk clients, high effort is selected under proportionate liability, and there is some evidence of a substantial reduction in contracting under joint and several liability.

Number of Pages in PDF File: 25

Keywords: Audit risk, Audit Pricing, Legal Liability

JEL Classification: M41, M42

Accepted Paper Series


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Date posted: March 25, 2011  

Suggested Citation

Gramling, Audrey A. and Schatzberg, Jeffrey W. and Bailey, Andrew and Zhang, Hao, The Impact of Legal Liability Regimes and Differential Client Risk on Client Acceptance, Audit Pricing, and Audit Effort Decisions (1998). Journal of Accounting, Auditing and Finance, Vol. 13, 1998. Available at SSRN: http://ssrn.com/abstract=1788871

Contact Information

Audrey A. Gramling
Colorado State University ( email )
Fort Collins, CO 80523-1771
United States
Jeffrey W. Schatzberg
University of Arizona - Department of Accounting ( email )
McClelland Hall 301
Tucson, AZ 85721
United States
520-621-2238 (Phone)
520-621-3742 (Fax)
Andrew Bailey
affiliation not provided to SSRN ( email )
Hao Zhang (Contact Author)
City University of Hong Kong ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
Feedback to SSRN


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