1.1 Background of the Study

Auditing is a fundamental concept in accountancy profession. The amount charged by the professional accounting firm has attracted a great deal of concern among academic researchers and practitioners. International Standards on Auditing No.15 (2011), audit fees are the amount paid to financial auditors for the certification of financial statements. In other words, audit fees can be defined as the amounts of fees (wages) charged by the auditor for an audit task performed on the accounts of an enterprise (auditee). The determination of the audit fees is based on the contract between the auditor and the enterprise in accordance with time spent on the audit process, and the service required (Simunic, 1980). There is a growing trend in accounting in recent years about the issue of audit fees relating to how auditors determine the amount of fees charged for audit services. This is a fundamental issue that needs to be investigated empirically for clarity.

The full separation between ownership and management demands the need for appointment of an auditor charged with the responsibility of examining the financial statements prepared by client’s management. The fee to be charged by the auditor for service or engagement within a given duration is very fundamental in auditing service. The audit fees and conditions of services boil down on the meeting of minds between the auditor and the client (Hayes et al. 2005). The auditing profession has come under increased scrutiny over the years about the growing amount of fees paid by audit client and the contributing impact of such fees on auditor independence (Geiger, & Papanatasiou, 2006; Geiger & Rama, 2003; Basioudis).Audit pricing is concerned with the determination of remuneration for auditor services that relates directly and primarily to the audit function. Following the market framework, early studies (Simunic 1980; Palmrose, 1986; butter worth and Houghton 1995; Davidson and Gist 1995) used the market framework to identify the determinants of audit pricing and hence the audit fee.Over the years, a preponderance of research has been devoted to unraveling the determinants of audit fee for developed economies.

They include the US studies, like Rubin {1988); Ettredge and Greenberg {1990); Pratt and Stice (1994); Taylor and Simon (1999); Callaghan, Bell, Landsman and Shackelford (2000); Mellett, Peel and Karbhari (2007); Parkash and Singhal {2008); and Bedard and Johnstone {2010). Similarly, the UK studies include Brinn, Peel and Roberts, (1994); Moizer, {1997); Pong {2004). Besides, studies from France include Gonthier-Besacier and Schatt, 12007), Denmark (Thinggaard & Kiertzner, 2008), Finland (Niemi, 2004), Belgium {Caneghem, 2009), Australia (Carson, fargher, Simon and Taylor, 2004; Carson and Fargher, 2006).Audit fees are of two types. The first are normal fees, which reflect the cost to perform the audit, including labour costs, expected litigation risk losses and normal profit (Simunic, 1980; Choi, Lui&Sumunic, 2005, Asthana & Boone 2012). Normal fees are usually determined by factors that are common across different clients such as client size, client complexity, and client-specific risk. The second kind is abnormal fees that include abnormal profits from audit engagement (Asthana & Asthana, 2012). These are fees specific to an auditor client relationship (Higgs &Stantz, 2006; Choi, Kim & Zang, 2006). Extant empirical literature is replete with studies on the determinants of audit (normal) fees. (Antle, Gordon, Naraymoorthy& Zhou, 2006; Asthana & Asthana, 2012; Choi, et al., 2005; Simunic, 1980; Whisenant, Sankaraguruswamy & Raghynandan, 2003). In the developed countries of Europe and America, empirical consideration on issues of abnormal audit fees is sparse, except for Choi, Kim and Zang (2006) on abnormal audit fees and audit quality; Xie, Cai, and Ye (2010) on abnormal audit fees and audit opinion.

However, the same cannot be said of developing countries with emphasis on Nigeria. In general, whether in the developed or developing countries, issues of determinants of abnormal audit fees have not received much empirical attention, safe for Ilaboya and Campbell (2015). Audit fee as an important factor of audit quality has been used in several studies, specifically in examining the link between audit quality and the size (e.g., DeAngelo, 1981; Francis, 2004; Hay & Davis, 2004). Greater audit fees are also associated with the choice of qualified auditors (Hay & Davis, 2004). In spite of higher audit fee, some clients are more interested in using large audit firms. Clients are confident that large audit firms have greater monitoring and bonding in order to capture higher audit quality (Hay & Davis, 2004). In terms of the auditor competence and specialization, including technical information and continuing education, large audit firms hire better professionals in comparison to small size firms. So, the larger the audit firm the higher auditor’s specialization (and audit quality) is expected and therefore higher audit fees is achieved (DeAngelo, 1981).

1.2 Statement of the Problem

Studies on the determination of audit fees have been conducted since 1980 (Simunic, 1980), with an emphasis on English-speaking countries. Some of these studies point out convergence in the sense that clients’ size and complexity are the main determinants of fees charged (Köhler & Ratzinger-Sakel, 2012; Haskins & Williams, 1988; Hassan & Naser, 2013; Kwon, Lim, & Simnett, 2014). Others indicate that the market pays higher values for large companies in the industry (Palmrose, 1986; Thinggaard & Kiertzner, 2008), perhaps because of firms’ good reputation and market concentration.The value of an audit lies on the perception coming from users of audited statements on the auditor’s ability to detect errors or breaches in the accounting system and to resist client pressures to disclose such discoveries (DeAngelo, 1981a). Auditing will have value to the extent that users of financial statements believe that the auditor is capable and he will not omit or deliberately choose which findings should be reported.The calculation of fees is a sensitive issue, where professional ethics and the interest of auditing did not allow that the prices budgeted are too high or too low. Marra and Franco (2001) suggest that the best way – for clients – to charge fees might be using a fixed and invariable value. Nevertheless, this procedure might lead to very high fees, damaging the client, or very low, damaging the auditor, having in mind that prices are budgeted by taking into account the number of hours or days required to conduct the audit.Hogan and Wilkins (2008) investigated how auditors respond to higher internal control risk levels. To do this, they analyzed 410 companies listed on the U.S. Stock Exchange that had reported material weaknesses in internal control. Thus, the authors found that audit fees are significantly higher for companies that showed significant weaknesses in internal control.

1.3 Objectives of the Study

The study sought to know the determinant of audit fee in quoted firm in the Nigerian Stock Exchange. Specifically, the study sought to; 1. examine extent at which audit firm’s size affect audit fees 2. examine the degree at which client firm’s size affect audit fees 3. Identify the effect of client’s firm profitability on audit fees.

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