Audit Of A Firm 's Total Assets

1295 WordsMay 8, 20166 Pages
The scale of a financial firm is related to the resources it owns and controls. One commonly used measurement of a firm’s scale is its total assets. Practically, the bigger a firm’s total assets, the more works it takes for auditors to collect audit evidences from this firm, since auditors have to lower the audit risk to the acceptable level with enough evidence. As a result, more human resources are involved into the audit service, which in turn lead to a higher audit costs and audit fees. To avoid problems of heteroscedasticity, the logarithm of total assets (ln assets) is chosen as an explanatory variable relevant to the logarithm of audit fees (ln fee) in the regression model. (Palmrose, 1986). Hypothesis 1. Audit fees of a Chinese…show more content…
Hypothesis 2. Issuing shares overseas will lead to a higher audit fees for a Chinese financial firm. 2.2.3 Government ownership With relevance to the impact of government ownership to audit fees, the influence could be positive or negative. State-owned enterprises (SOEs) tend to manipulate financial information through creative accounting (Chen et al. 2008), which makes it hard for auditors to identify potential risk of the business. Moreover, SOEs tend to put political pressure on auditors for them to give a qualified audit opinion. Things mentioned above could to some extent add to total audit costs since auditors would spend more time negotiating with the client firm and identifying potential business risks. In another case, SOEs in China benefit more from government policies than other firms. According to Chen et al. (2008), “direct subsidies are offered to SOEs to avoid being delisted”. These benefits lower a firm’s risk of being bankruptcy, thereby lower audit risk and audit fees. Therefore, whether a financial firm is a SOE is chosen as an independent variable in the regression analysis. Hypothesis 3a. In China, a state-owned financial firm is charged with higher audit fees than others. Hypothesis 3b. In China, a state-owned financial firm is charged with lower audit fees than others. 2.2.4 Capital structure Debt to equity (D/E) ratio is often used as an independent variable of audit pricing model to measure a firm’s capital
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