The Effects of Information Asymmetry on Audit Fees

Abstract

Audit fees refer to the financial compensation received by accounting firms and auditors in return for the delivery of their professional services. These services encompass a range of operations, including the analysis of financial statements, evaluation of internal controls, and performance of numerous other tasks linked to auditing. Typically, organizations remunerate external audit firms for their services through fees, which can be either annual or based on the specific services rendered. The remuneration for audit services is commonly subject to variability, with adjustments made based on the particular audit engagement's scope and complexity. This paper delves into the correlation between information asymmetry and audit fees. The concept of information asymmetry arises when there is an unequal distribution of information between two parties involved in a transaction, leading to an imbalance in knowledge. This phenomenon has a notable influence on the determination of audit fees. This paper examines the theoretical underpinnings, empirical findings, and practical ramifications of the impact of information asymmetry on audit costs and the quality of audit services. The work analyzes the elements that contribute to information asymmetry by conducting a comprehensive review of current literature and empirical studies. Through this analysis, the study sheds light on the complex dynamics between information asymmetry, audit fees, and audit quality.