Audit Effort and Market-perceived Risk: Evidence from South Korea

Abstract

Auditors incur a loss of credibility and/or status or litigation costs only when investors recognise audit failures. In this respect, auditors may be concerned about an increase in market-perceived risk even though the total amount of audit risk is constant. Consistent with this reasoning, I find that auditors increase audit effort in response to increases in market-perceived information risk. This suggests that the expected costs of audit failures are a function of investors’ recognition, and thus increased market-perceived risk causes auditors to become more concerned about their audit failures and to increase audit effort. Further, this study shows that audit effort is effective in reducing market-perceived information risk, suggesting that auditors contribute to the information environment.