The Effect of Standard Audit Hours Policy on Audit Quality and Cost of Equity Capital ：Focused on Class－specific Audit Hours
Asian Tax Journal Vol. 23 No. 3 (2022), pp. 93-124
Abstract
This paper investigates the impacts of Standard Audit Hours Policy on audit quality and cost of equity capital, especially focusing on audit firms’ class－specific audit hours. Standard Audit Hours Policy mandates a certain amount of audit hours for external auditors to comply with in order to maintain audit quality. After the introduction of the Standard Audit Hours Policy, it is expected to enhance firm value through improved audit quality and accounting transparency. Restatements are used as a proxy for audit quality and both total audit hours and audit hours by each class are used for capturing audit effort. Using public firms between 2016 and 2019, we find that audit hour is increased and audit quality is improved after the introduction of the Standard Audit Hours Policy. Also, it is shown that audit hours of partners, registered and quality management auditors have significant effects on audit quality. In other words, the effect of the introduction of the Standard Audit Hours Policy on audit quality is concentrated in certain classes of auditors. Finally, after the introduction of the Standard Audit Hours Policy, it is found that the firm’s cost of equity capital is decreased. Overall, it seems necessary to properly allocate audit hours by classes rather than simply increasing total audit hours. This study investigates the overall effect of the introduction of the Standard Audit Hours Policy, providing insights regarding the related policies and literatures.
Keywords
- standard audit hours policy
- audit effort
- audit quality
- cost of equity capital
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