The Effect of Write-Offs on Audit Fees: Theory and Evidence

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi
dc.contributor.advisor Jarva, Henry
dc.contributor.author Pakarinen, Sanna-Kaisa
dc.date.accessioned 2018-10-05T07:02:38Z
dc.date.available 2018-10-05T07:02:38Z
dc.date.issued 2018
dc.identifier.uri https://aaltodoc.aalto.fi/handle/123456789/34154
dc.description.abstract The objective of this master’s thesis is to examine the effect of write-offs on audit fees. The research focuses on a question whether the audit fee increases if the amount of write-offs increases and in what magnitude. In addition, other determinants of audit fees, auditor and auditee characteristics, are studied. The study also presents general principles and processes related to writing off an asset as well as some challenges related to them also from auditors’ point of view. The empirical tests are executed with a regression analysis. The data is collected from Compustat and Audit Analytics databases and it includes write-offs that are done during the period between 2005 and 2017 by US listed companies. After adjusting the data, the final sample consists of 5809 observations. The data includes observations from all industries (excluding financial institutions) and write-offs of different accounts. Companies’ audit fee and financial information are merged by using companies’ CIK codes. Prior research literature presents a common audit fee pricing theory in which the audit fee is a proxy for audit effort and different auditee and auditor characteristics impact on the amount of the fee. When combining write-offs into the fee model, audit effort is expected to raise as the write-offs and impairment tests are prone to management manipulation as the fair value estimates are partly made based on their own judgements. The unverifiable results create challenges for auditors to give an audit opinion whether the companies’ financial statement are free from material misstatements and the information is accurate. In addition, auditee characteristics such as company size, profitability, riskiness and complexity are factors affecting the audit effort. Also, whether the auditor is a one of the Big 4 companies, is studied to have an increasing effect on audit fees. The results of this thesis suggest that one percentage point increase in write-offs, increases audit fee by 0.011 %. The effect is positive as hypothesized but it is minor. However, companies with large annual write-offs encounter raise in their audit fee. The research findings also support the audit fee determinants with results that indicate that the larger the company, as in more assets and sales, the higher the audit fee is. In addition, Big 4 auditors’ audit fees are 53.8 % higher than non-Big 4 auditors’. These study results extend and support the prior research literature of write-offs and audit fees with a conclusion that write-offs, as well as other discussed determinants, have an effect on audit fees. Companies and auditors can further exploit the findings in business practice. en
dc.format.extent 59 + 7
dc.language.iso en en
dc.title The Effect of Write-Offs on Audit Fees: Theory and Evidence en
dc.title Alaskirjauksien vaikutus tilintarkastuspalkkioihin: Teoria ja todiste fi
dc.type G2 Pro gradu, diplomityö fi
dc.contributor.school Kauppakorkeakoulu fi
dc.contributor.school School of Business en
dc.contributor.department Laskentatoimen laitos fi
dc.subject.keyword write-off en
dc.subject.keyword impairment en
dc.subject.keyword audit fees en
dc.subject.keyword accounting conservatism en
dc.identifier.urn URN:NBN:fi:aalto-201810055236
dc.type.ontasot Master's thesis en
dc.type.ontasot Maisterin opinnäyte fi
dc.programme Accounting en
dc.subject.helecon laskentatoimi fi
dc.subject.helecon alaskirjaus fi
dc.subject.helecon kirjanpito fi
dc.subject.helecon tilintarkastus fi
dc.subject.helecon palkkiot fi
dc.ethesisid 17300
dc.location P1 I fi
local.aalto.electroniconly yes
local.aalto.openaccess no


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