The Effects of Financial Statement Disaggregation on Audit Pricing

Koh K., Y. H. Tong, & Z. Zhu. The Effects of Financial Statement Disaggregation on Audit Pricing. International Journal of Auditing, Forthcoming.

Posted: 15 Jun 2016 Last revised: 19 Oct 2021

See all articles by Kevin Koh

Kevin Koh

Nanyang Technological University (NTU) - Nanyang Business School

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School

Zinan Zhu

Nanyang Technological University (NTU)

Date Written: October 3, 2021

Abstract

We examine whether the extent of financial statement disaggregation affects the pricing of audit engagements in the US. We hypothesize and find that auditors assess higher engagement risk and charge higher audit fees for clients with more disaggregated financial statements. We also find that these higher audit fees are not the result of either increased auditor effort to mitigate detection risk or heightened inherent and control risks reflected in lower financial reporting quality. Instead, we document that greater financial statement disaggregation is positively associated with litigation risk. This result suggests that higher audit fees arise out of auditors’ assessments of heightened client and auditor business risks associated with litigation. While financial statement disaggregation may have beneficial effects on the quality of financial information, we document that financial statement disaggregation can impose costs on firms in terms of higher audit fees and a higher likelihood of litigation. Our study informs standard setters, firms, and auditors as they debate the costs, benefits, and extent of disaggregation to be presented in financial statements.

Keywords: financial statement disaggregation, audit fees, financial reporting quality, litigation risk, audit risk

JEL Classification: M41, M42

Suggested Citation

Koh, Kevin and Tong, Yen H. and Zhu, Zinan, The Effects of Financial Statement Disaggregation on Audit Pricing (October 3, 2021). Koh K., Y. H. Tong, & Z. Zhu. The Effects of Financial Statement Disaggregation on Audit Pricing. International Journal of Auditing, Forthcoming., Available at SSRN: https://ssrn.com/abstract=2795401 or http://dx.doi.org/10.2139/ssrn.2795401

Kevin Koh

Nanyang Technological University (NTU) - Nanyang Business School ( email )

S3-B2C-96, Nanyang Avenue
Nanyang Business School , NTU
Singapore, 639798
Singapore
(+65) 6790 4096 (Phone)

Yen H. Tong (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore 639798
Singapore
65-6790-5743 (Phone)

Zinan Zhu

Nanyang Technological University (NTU) ( email )

50 NANYANG AVENUE
S3 B1B-65
Singapore, 639798
Singapore

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,673
PlumX Metrics