2. Overview of prior research
2.1. Factors associated with audit fees
Audit fees have been a subject of interest in the auditing literature since the pioneering research of Simunic
(1980). Simunic (1980) posits that audit fees are determined by the loss exposure of the auditee, the apportionment
rate of loss between the audit firm and the auditee, and the production function and characteristics of the
audit firm. He provides empirical evidence to show that the scale of the auditee is the main factor influencing
audit fees, although the number of consolidated subsidiaries included in the auditee’s financial statements,
number of industries in which the auditee operates, ratio of the auditee’s assets abroad to total assets at
year-end, ratio of receivables to total assets at year-end, ratio of inventory to total assets at year-end and
whether an auditee incurred a loss in the most recent 3 years or received a “subject to” qualified opinion also
have a significant influence. Simunic finds the ratio of net income to total assets at year-end, auditor tenure
and audit firm scale to have no significant influence on audit fees. Francis (1984) investigates the Australian
audit market using a modified Simunic model and also finds the scale of listed companies’ assets and a variable
reflecting the complexity of business transactions or events (the number of consolidated subsidiaries) to be significantly
related to audit fees. However, contrary to Simunic (1980), Francis also finds the scale of the audit
firm to be significantly related to audit fees. Francis and Stokes (1986) investigate the 96 largest and 96 small-
2. Overview of prior research
2.1. Factors associated with audit fees
Audit fees have been a subject of interest in the auditing literature since the pioneering research of Simunic
(1980). Simunic (1980) posits that audit fees are determined by the loss exposure of the auditee, the apportionment
rate of loss between the audit firm and the auditee, and the production function and characteristics of the
audit firm. He provides empirical evidence to show that the scale of the auditee is the main factor influencing
audit fees, although the number of consolidated subsidiaries included in the auditee’s financial statements,
number of industries in which the auditee operates, ratio of the auditee’s assets abroad to total assets at
year-end, ratio of receivables to total assets at year-end, ratio of inventory to total assets at year-end and
whether an auditee incurred a loss in the most recent 3 years or received a “subject to” qualified opinion also
have a significant influence. Simunic finds the ratio of net income to total assets at year-end, auditor tenure
and audit firm scale to have no significant influence on audit fees. Francis (1984) investigates the Australian
audit market using a modified Simunic model and also finds the scale of listed companies’ assets and a variable
reflecting the complexity of business transactions or events (the number of consolidated subsidiaries) to be significantly
related to audit fees. However, contrary to Simunic (1980), Francis also finds the scale of the audit
firm to be significantly related to audit fees. Francis and Stokes (1986) investigate the 96 largest and 96 small-
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