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The regulation of public company auditing: Evidence from the transition to AS5
1. Relative to AS2, does AS5 increase the association between audit fees and auditee fraud risk
2. Are AS5 audit fees, on average lower than their AS2 benchmark
3. How does AS5 affect fees for higher-fraud risk auditees.
Tables and results
Tables and sample
By: Mike Bialecki
AS2 Versus AS5
Audit standard 2
Initially considered regulation over reach
Contains over 200 sub-points
Looks into internal controls over financial reporting and audit of financial statements
Look into professional judgement
Framework for efficiency and effectiveness
1) The new standard is shorter, less prescriptive, and easier to read.
2) AS5 makes the audit scalable—so it can change to fit the size and
complexity of any company.
3) The new standard directs auditors to focus on what matters most and
eliminates unnecessary procedures from the audit.
4) Finally, AS5 includes a principles-based approach to determining
when and to what extent the auditor can use the work of others.
Quality of external audit hard to judge
Darby and Karni (1973) : presence of quality uncertainty regulations can improve market functions
Auditing standards create a minimum requirement
Over-regulation exists from a crisis
AS5 audit fees are aligned with auditee fraud risk while AS2 fees are not
AS5 audit fees are, on average, lower that AS2 fees
AS5 audit fees are, on average lower for lower-risk clients and higher for higher-risk clients
Any additional questions?
Motivation behind study:
AS2 was only applicable to public companies with market value over $75million
The big 4 make up 83% of these audited reports for this time frame
1) is an accelerated filer in both the current and immediately preceding periods,
2) has been audited by the same, sole, Big Four auditor in both the current and immediately preceding periods,
3) is a U.S.-domiciled entity,
4) has a primary Standard Industrial Classification (SIC) code other than 4400–4999 or 6000–6999 (both inclusive),
5) has a fiscal year length not less than 340 days and not greater than 390 days, and,
6) does not report a material weakness in internal controls over financial reporting.