Audit Fees and Their Association with Audit Quality and Auditor Effort

Abstract

This research investigates the complex, non-linear relationship between audit
fees, audit quality, and auditor effort, challenging the prevailing linear assumptions
in existing literature. We propose a novel methodological framework that integrates econometric analysis with computational simulation to model audit quality
as a multi-dimensional construct influenced by fee structures, regulatory environments, and technological adoption. Unlike prior studies that treat audit fees as
either a simple input or output variable, our approach conceptualizes fees as a
dynamic equilibrium point in a principal-agent relationship complicated by information asymmetry and technological mediation. We develop and test a tripartite
model that distinguishes between fee adequacy, fee pressure, and fee premium, each
exerting distinct influences on auditor behavior and output quality. Our findings
reveal a threshold effect where moderate fee increases correlate with quality improvements up to an optimal point, beyond which diminishing returns and potential
quality degradation occur. Furthermore, we demonstrate how digital audit tools
and continuous monitoring systems, as referenced in contemporary audit literature,
fundamentally alter the effort-quality-fee nexus by enabling more efficient evidence
collection and analysis. The study contributes original insights by identifying specific conditions under which fee variations signal different audit quality outcomes,
providing auditors, audit committees, and regulators with a more nuanced understanding of fee structures’ implications. Our computational simulations, validated
against empirical audit data, offer predictive models for fee-quality relationships
under varying market conditions and technological implementations.