Macroeconomic Uncertainty, Audit Pricing, and Audit Effort: Evidence from Korea

This study examines the association between macroeconomic uncertainty, audit fees, and audit hours. Prior studies suggest that audit fee pressure under uncertainty may lead to a negative association between macroeconomic uncertainty and audit fees. However, we do not know whether lower audit fees under high uncertainty are driven by less audit effort or lower audit price per hour. Using Korean setting where disclosure of audit hours is mandatory, we find evidence that both audit fees and audit effort are lower under uncertainty. More interestingly, we find that while uncertainty lowers audit fees, unit audit price appears to be higher under uncertain times. To search for the reasons for high unit audit price under uncertainty, we utilize a subsample of firm-year observations with available audit rank hour data, and find evidence that under high uncertainty, audit firms allocate more senior hours rather than junior hours. While prior studies show concern that lower audit price under uncertainty may lead to audit deficiencies, our evidence of auditors allocating more resources to senior staff instead of junior staff suggests that lower total audit fee does not necessarily mean audit deficiencies. Overall, our study complements prior literature that examines the determinants of audit fees, audit pricing and audit effort.