Abstract

Audit risk and business risk have been shown to affect audit fees and hours which are used to represent auditors' efforts in previous studies. However, most previous studies consider only one of these types of risk, or focus on audit risk rather than business risk to estimate auditor efforts. This study investigates the simultaneous effects of audit risk and business risk on auditor efforts. The data of Korean listed firm is used and business risk is measured by the degree of market competition. This study verifies that when audit risk and business risk are considered simultaneously, the effect of audit risk on audit fees and hours diminishes with lower business risk. Auditors are less concerned about audit risk in less competitive markets than in highly competitive markets because auditor is less exposed to litigation risk due to the nature of less competition. In addition, this study investigates the unilateral effect of fluctuations in business risk on auditor efforts. As a result, the study provides evidence that market competition is significantly associated with auditor efforts in terms of audit fees and hours.

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