Summary

Over time, every auditor must charge sufficient fees to cover all costs such that the audit service can be continuously provided. The audit costs include two components: the direct costs and the costs associated with audit failure. These two costs are intertwined and are determined by the size of the auditee, the complexity of the auditee operations, the significance of particular accounts in the financial statements, and the risk of the client. The audit fees are ultimately determined by the extent of competition in an audit market. Factors that can influence the audit fees in the audit environment include: the auditor’s size, expertise, and efficiency; the number of auditors and auditees in the market and an auditor’s client portfolio; client characteristics and risks; and auditing standards and audit approach. The lack of competition and variation in audit efficiency can also result in real rents in audit fees.

End-of- chapter question

What do auditors consider when pricing their audit services?