Engagement risk, auditor choice and audit fee in the Malaysian audit market

High risk of auditor litigation and audit market competitiveness motivate audit firms to place greater emphasis on the role of engagement risk in determining client-auditor relationship and audit cost (Johnstone, 2000; Johnstone & Bedard, 2004). Based on this development, this study examines...

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Main Author: Mohamad Naimi, Mohamad Nor
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Language:eng
eng
Published: 2015
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Online Access:https://etd.uum.edu.my/5298/1/s92786.pdf
https://etd.uum.edu.my/5298/2/s92786_abstract.pdf
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record_format uketd_dc
institution Universiti Utara Malaysia
collection UUM ETD
language eng
eng
advisor Abidin, Shamharir
Ahmad Zaluki, Nurwati Ashikkin
topic HF5601-5689 Accounting
HF5601-5689 Accounting
spellingShingle HF5601-5689 Accounting
HF5601-5689 Accounting
Mohamad Naimi, Mohamad Nor
Engagement risk, auditor choice and audit fee in the Malaysian audit market
description High risk of auditor litigation and audit market competitiveness motivate audit firms to place greater emphasis on the role of engagement risk in determining client-auditor relationship and audit cost (Johnstone, 2000; Johnstone & Bedard, 2004). Based on this development, this study examines the market structure and the impact of engagement risk on auditor choice and audit pricing in a low litigation risk setting. Drawing from the agency theory and its related hypotheses, the study anticipates that audit risk, auditor business risk and client business risk are significantly associated with auditor choice and audit fee. The samples of study consist of Malaysian public listed companies from 2008 to 2010. The descriptive analysis of 2,854 companies demonstrates that the Malaysian audit market can be described as a tight oligopoly. In determining the influence of risk on auditor choice and audit fee, some exclusion criteria were established. Using panel data analysis on 2,451 companies, it is found that engagement risk significantly influences auditor choice and audit fee. In particular, auditor business risk is more important than the other risks in auditor choice and it is positively associated with the choice of quality auditor whereas, audit risk elements are more dominant than the other risk factors in explaining audit fee. Auditors will charge higher audit fees for clients with higher audit risks. The engagement risk affects auditor choice and audit fee differently because of the different risk management practices by audit firms in establishing their client portfolio. Avoidance of small and risky clients among large audit firms would increase companies’ difficulty to access the capital market and delay growth. This study contributes to the auditing literature by addressing the audit firm’s risk management strategy in Malaysia, which is rarely investigated. The study also provides an insight into the regulator on factors that should be considered in enhancing the quality of an audit firm
format Thesis
qualification_name Ph.D.
qualification_level Doctorate
author Mohamad Naimi, Mohamad Nor
author_facet Mohamad Naimi, Mohamad Nor
author_sort Mohamad Naimi, Mohamad Nor
title Engagement risk, auditor choice and audit fee in the Malaysian audit market
title_short Engagement risk, auditor choice and audit fee in the Malaysian audit market
title_full Engagement risk, auditor choice and audit fee in the Malaysian audit market
title_fullStr Engagement risk, auditor choice and audit fee in the Malaysian audit market
title_full_unstemmed Engagement risk, auditor choice and audit fee in the Malaysian audit market
title_sort engagement risk, auditor choice and audit fee in the malaysian audit market
granting_institution Universiti Utara Malaysia
granting_department Othman Yeop Abdullah Graduate School of Business
publishDate 2015
url https://etd.uum.edu.my/5298/1/s92786.pdf
https://etd.uum.edu.my/5298/2/s92786_abstract.pdf
_version_ 1747827902803607552
spelling my-uum-etd.52982021-04-04T07:41:57Z Engagement risk, auditor choice and audit fee in the Malaysian audit market 2015 Mohamad Naimi, Mohamad Nor Abidin, Shamharir Ahmad Zaluki, Nurwati Ashikkin Othman Yeop Abdullah Graduate School of Business Othman Yeop Abdullah Graduate School of Business HF5601-5689 Accounting HF5667 Professional Ethics. Auditors. High risk of auditor litigation and audit market competitiveness motivate audit firms to place greater emphasis on the role of engagement risk in determining client-auditor relationship and audit cost (Johnstone, 2000; Johnstone & Bedard, 2004). Based on this development, this study examines the market structure and the impact of engagement risk on auditor choice and audit pricing in a low litigation risk setting. Drawing from the agency theory and its related hypotheses, the study anticipates that audit risk, auditor business risk and client business risk are significantly associated with auditor choice and audit fee. The samples of study consist of Malaysian public listed companies from 2008 to 2010. The descriptive analysis of 2,854 companies demonstrates that the Malaysian audit market can be described as a tight oligopoly. In determining the influence of risk on auditor choice and audit fee, some exclusion criteria were established. Using panel data analysis on 2,451 companies, it is found that engagement risk significantly influences auditor choice and audit fee. In particular, auditor business risk is more important than the other risks in auditor choice and it is positively associated with the choice of quality auditor whereas, audit risk elements are more dominant than the other risk factors in explaining audit fee. Auditors will charge higher audit fees for clients with higher audit risks. The engagement risk affects auditor choice and audit fee differently because of the different risk management practices by audit firms in establishing their client portfolio. Avoidance of small and risky clients among large audit firms would increase companies’ difficulty to access the capital market and delay growth. This study contributes to the auditing literature by addressing the audit firm’s risk management strategy in Malaysia, which is rarely investigated. The study also provides an insight into the regulator on factors that should be considered in enhancing the quality of an audit firm 2015 Thesis https://etd.uum.edu.my/5298/ https://etd.uum.edu.my/5298/1/s92786.pdf text eng public https://etd.uum.edu.my/5298/2/s92786_abstract.pdf text eng public Ph.D. doctoral Universiti Utara Malaysia Abbott, L. J., & Parker, S. (2000). Auditor selection and audit committee characteristics. Auditing: A Journal of Practice and Theory, 19(2), 47-66. Abbott, L. J., Gunny, K., & Tracey, C. (2013). When the PCAOB talks, who listens? Evidence from stakeholder reaction to GAAP-deficient PCAOB inspection reports of small auditors. 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