Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    The effect of Auditing Standard No. 5 on audit fees
    research summary posted March 11, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    The effect of Auditing Standard No. 5 on audit fees
    Practical Implications:

    The results provide support for regulators’ expectations about AS5’s overall fee-saving (but not their expectations of greater savings for smaller, less complex companies). The authors conclude that overall, there was a reduction in audit fee under the AS5 standard, but mainly for complex firms.

    For more information on this study, please contact Jagan Krishnan.


    Krishnan, J., J. Krishnan, and H. Song. 2011. The effect of Auditing Standard No. 5 on audit fees. Auditing: A Journal of Practice & Theory 30(4): 1-27.

    audit fee; AS5; audit quality; PCAOB; SOX 404.
    Purpose of the Study:

    In light of the controversy over implementation cost surrounding Auditing Standard No. 2 (AS2), the PCAOB responded by superseding AS2 with Auditing Standard No. 5 (AS5), An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements, effective for fiscal years ending November 15, 2007.  This paper examines the effect of the change from AS2 to AS5 on audit fees. The paper seeks to answer the following questions:

    • Were audit fees lower in the first two years of adoption of AS5 (other things being equal) compared to AS2?
    • More specifically, did AS5 have an impact on audit fees for firms with material weaknesses in internal control?
    • Was there was a difference in fee changes across client size/complexity groups?
    Design/Method/ Approach:

    The study’s primary tests are based on a comparison of audit fees in 2006 (the last year of AS2 audits) with audit fees in 2007–2008 (the first two years of AS5 audits) for a sample of ‘‘stable’’ auditor-client relationships.  Thus, the sample period was 2006-2008. The authors employ a longitudinal sample of firms (the ‘‘full sample’’) that had the same auditor over the four-year period 2005–2008, thus including a year prior to the sample period. Additionally, the study examines the fee trends for a ‘‘clean sample’’ consisting of firms that had clean ICFR opinions throughout our sample period.            


    Overall, the authors find AS5 had a statistically negative effect on audit fees.

    • After controlling for previously identified covariates of audit fees, the authors find audit fees were lower in the first two years of AS5 implementation as compared with the last year of AS2 (4.11 percent and 3.92 percent, based on the median firm, for the full and clean samples, respectively)
    • Consistent with previous work, this study finds that firms with adverse opinions on internal control pay higher fees than those with clean opinions. However, the premium paid by client with adverse opinions is smaller under AS5 than under AS2, which is consistent with a reduction in over auditing or over-conservatism in reporting material weaknesses.
    • Contrary to the expectation that less complex firms would benefit from AS5, this study reports a reduction in audit fee under the AS5 standard mainly for complex firms.
    Internal Control, Standard Setting
    Changes in Audit Standards, Impact of 404 on Fees and Financial Reporting Quality