Abstract

We analyzed the effect of short－term debt of firms that are loans from financial institutions on audit fees and audit hours. The purpose of this paper is to find out how auditors respond to their role in monitoring short－term debt in terms of risk management of financial institutions through audit fees and audit hours. We find that short－term debt is negatively associated with audit fees but not associated with audit hours. Also, we examined whether the relation between short－term debt and audit fees and audit hours is stronger or weaker in low credit rating firms. The result shows that the negative relation between short－term debt and audit fees and audit hours is weaker in low rated firms than in high rated firms. In addition, we examined whether the relation between short－term debt and audit fees and audit hours is stronger or weaker among firms with low ownership percentage of foreign shareholders. We find that the negative relation between short－term debt and audit fees and audit hours is weaker among firms with low ownership percentage of foreign shareholders. These results indicate that the higher the ratio of short－term debt, the stronger the monitoring of financial institutions, the lower audit risk auditors assess. And then auditor respond to audit risk through audit fees and audit hours. Analyses of low credit ratings and low ownership percentage of foreign shareholders set as audit risk factors showed that the monitoring effect of financial institutions decreased. Recognizing the liquidity risk of a firm with a lower credit rating and the low level of checking and monitoring of the management activities of a firm with a lower ownership percentage of foreign shareholders, the auditor may interpret it as requiring more audit hours and a higher level of audit fees. This study finds that auditors actually considered the role of monitoring financial institutions due to short－term debt in audit pricing and deciding input of audit hours. This differs from the way many prior literature approached debt ratios in terms of liquidity. This contributes that the auditor analyzed the relationship of responding to audit fees and audit hours by considering other audit risk factors, along with the role of monitoring financial institutions.

Keywords

• Short－term Debt
• Credit Rating
• Ownership Percentage of Foreign Shareholders
• Audit Fees
• Audit Hours

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