The Effects of Business Risk on Audit Pricing

Posted: 9 Jul 1999

See all articles by Phillip C. Stocken

Phillip C. Stocken

Dartmouth College - Tuck School of Business

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

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 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.

JEL Classification: M49, D41

Suggested Citation

Stocken, Phillip C. and Morgan, John, The Effects of Business Risk on Audit Pricing. Available at SSRN: https://ssrn.com/abstract=167152

Phillip C. Stocken (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,601
PlumX Metrics