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Auditing (A307)


audit pricing; audit fees; audit production; accruals; earnings management.


  1. Caren Schelleman
  2. W. Robert Knechel




    study investigates how risk associated with increased levels of accruals that
    might be indicative of earnings management affects the pricing and production
    of audit services. Francis and Krishnan _1999_ suggest that auditors can deal
    with the risk of earnings management in five ways: _1_ screen out high-risk
    clients; _2_ charge a premium to riskier clients; _3_ increase audit effort;
    _4_ negotiate adjustments to the financial statements; and/or _5_ report more
    conservatively _e.g., by issuing a modified report_. Using a unique data set,
    the current study investigates two of these options: charging a fee premium and
    increasing audit effort. Based on previous research on audit pricing and
    production, we construct models for audit fees, total audit effort, labor mix
    _extent of experienced auditor effort_, and engagement profit margin including
    an accruals measure that could indicate earnings management. We test these
    models on a sample of 119 audit engagements from one Big 6 audit firm in The
    Netherlands. We find that signed short-term accruals are associated with a
    significant increase in audit fees as well as total effort, but not with
    experience mix or profit margin. However, we find secondary evidence that
    auditors utilize more supervisors, assistants and support personnel and earn
    smaller profits _returns_ when a client has higher levels of shortterm
    accruals. Taken together, these results suggest that auditors are responsive to
    high levels of short-term accruals that may be indicative of earnings management,
    and will increase their work effort even if they are unable to recoup all of
    the related costs.



    Vol 29, Nomor 01 CD, Tahun 2010


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