Abstract
This paper uses a model extended from DeAngelo (1981) to examine audit market and audit pricing. When auditors have differential operational efficiencies, the audit market becomes delicate. On one hand, auditees would like to reduce audit fees by to purchasing audit services from the most efficient auditors. On the other hand, the competition in the market can be significantly reduced when there are few auditors in a market. The auditees can end up paying the highest fees despite the auditors are very efficient. This paper concludes that auditees can minimize auditing fees by maintaining an optimal number of auditors in the market, including some less efficient auditors. The large auditees would have to pay more for they have fewer choices in a market than small auditees. In order to maintain reasonable competition among auditors in a market, auditees pay the more efficient auditors higher fees.
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