Audit Fee

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The current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm Past control risk and current audit fees

Past control risk

Thomas G. Calderon, Li Wang and Thomas Klenotic
George W. Daverio School of Accountancy, The University of Akron,
Akron, Ohio, USA

693

Abstract
Purpose – The authors posit that audit fees are driven by historical risk factors and risk encountered in the current period. The purpose of this paper is to focus on historical risk by examining the incremental effect of material weakness in internal control (MW) identified in prior periods on current audit fees, after current risk factors are controlled for.
Design/methodology/approach – The paper uses
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Increased engagement effort due to high risk in ICFR can be passed along to clients through audit fees. In addition, audit tests cannot uncover all possible material misstatements; as a result, auditors may add a risk premium to audit fees for risky clients.
Such risk premiums, which compensate the auditors for potential losses associated with high-risk clients, go beyond the incremental fees the auditors may charge for increased audit effort.
Although studies prior to SOX yield mixed results (O’Keefe et al., 1994; Felix et al.,
2001), recent studies have found supporting evidence of a contemporaneous positive relationship between current control risk and current audit fees by using ICDs disclosures under SOX (Raghunadan and Rama, 2006; Hoitash et al., 2008; Hogan and
Wilkins, 2008; Bedard et al., 2008). Nevertheless, prior studies have not addressed whether control risk identified in prior periods affects current period audit fees. This is an important question as generally accepted auditing standards require the auditor to assess the effects of prior ICFR deficiencies on current period audit procedures and risk assessment. In practice, auditors rely heavily on past audit results in audit planning for the current period. Thus, past
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