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UBC Theses and Dissertations

On the relationship between audit risk and security market measures of risk Stein, Michael T.


This research investigates the relationship between security market measures of risk and audit risk. The auditor's decision making environment is extended to include the actions of the client firm's shareholders. Using the Nash equilibrium concept it is shown that, in equilibrium, the expected costs of auditing increase with the probability of a "bad" outcome in the securities markets. This result obtains in both strict liability and negligence regimes. The result is driven, in part by the insurance role of auditing. In empirical tests an association is established between security risk and audit fees. These tests suggest that security market measures of risk may provide information useful to the auditor in his decision making.

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