Does Audit Risk Affect The Audit Fee?
Ahmad Muhajir
Faculty of Economics & Business, Universitas Airlangga, Surabaya, Indonesia
Keywords: Audit Fees, Control Risk, Detection Risk, Inherent Risk, Risk Assessment.
Abstract: The risk assessment procedure is the most significant procedure in a general audit. Risk assessment is
commonly used to assess the risks of any potential material misstatement. In assessing risk, an auditor
considers three major components consisting of inherent risk, control risk, and detection risk. This research
aims to examine empirically whether these three audit risk components significantly affect the audit fee.
The three components of audit risk can be considered by an auditor at a public accountancy firm in
performing audit planning, such as determining the time and budget plan, the number of auditors assigned to
the fieldwork, and the audit scope to collect relevant audit evidence. Therefore, the auditor at a public
accounting firm can determine the audit fee suitable for the job. This study used managers and partners from
a public accounting firm in East Java that are registered on the public accounting firm directory published
by IICPA. The samples taken for this study are from 86 audit managers and audit partners. This study used
inherent risk, control risk, and detection risk as independent variables and the audit fee as the dependent
variable. In this research, a T-test was used to identify the effect of independent variables on the dependent
variable with the assistance of SmartPLS 3.0 for Windows.
1 INTRODUCTION
Certified public accountants provide assurance
services related to management assurance of
financial statements and are licensed by the Minister
of Finance with the issuance of the Regulation of the
Minister of Finance No. 17/PMK.01/2008 and later
supported by The Public Accountants Act No. 5 of
2011, which discusses public accountants. A public
accountant is required to always follow current
information including changes to the general
financial accounting standards and professional
standards of certified public accountants issued by
professional organizations and other official
regulations.
As of January 1
st
, 2013, Indonesia has used
International Standards on Auditing (ISA) in
determining the professional standards of certified
public accountants to be used by Indonesian
auditors. The ISA considers risks involved in
carrying out the audit fieldwork. Tuanakotta (2013)
divides audit risk into three main parts, namely
inherent risk, control risk, and detection risk.
Inherent risk is the vulnerability of an assertion to a
material misstatement. It relates to internal or
external events or circumstances arising from the
entity’s purpose, the nature of the entity’s operations
or the scope of the entity’s industry, the client’s
location, and the complexity of the client’s business.
The control risk emerges from the client’s
inadequate internal control. The third component is
detection risk meaning the material misstatement is
not detected by the auditor due to improper selection
and implementation of audit procedures.
At the audit planning stage, the auditor identifies
audit risks that may occur. A complex audit process
may be caused by a high audit risk. Audit risk plays
a significant role in the determination of audit fees
by public accounting firms. However, the audit risk
may not affect the audit fees since the fee
determination generally considers other factors such
as business competition among public accounting
firms.
The Institut Akuntan Publik Indonesia is the
official body that regulates Certified Public
Accountants (CPA) and legally empowers it to set
auditing standards and ethical standards as well as
publish the rules regarding audit fees; No.
KEP.024/IAPI/VII/2008 was updated on
Management Regulation No. 2 in 2016 regarding the
determination of audit fees.
Muhajir, A.
Does Audit Risk Affect The Audit Fee?.
In Proceedings of the Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 37-42
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
37

There are some researchers who have
investigated studies closely related to this research.
In a study conducted by Simunic (1980) entitled
“The Pricing of Audit Services: Theory and
Evidence”, the independent variables used were
entity size, audit risk based on the current ratio,
quick ratio, debt-to-equity ratio, litigation risk, and
audit complexity. Meanwhile, the dependent
variable used was the audit fee. The results of this
study indicate that entity size, audit risk based on the
current ratio, quick ratio, debt-to-equity ratio,
litigation risk, and audit complexity have a positive
effect on the audit fee.
The second study was conducted by Suharli and
Nurlaelah (2008) with the title “Auditor
Concentration and Determination of Audit Fee:
Investigation at State Enterprise”. This study
examined the effect of concentration ratio, size of
the public accountancy firm (KAP), auditee size, and
subsidiary company against the audit fee. The results
obtained from this study indicate that concentration
ratio and auditee size have a significant relationship,
while the size of the CPA firm and the number of
subsidiaries have no significant relationship to the
audit fee.
Next, Herawaty (2011) conducted a study
entitled “The Influence of Internal Control and the
Time Budget of Audit on Audit Fee”. The results
obtained from this study reveal that partial internal
control has a positive influence on the audit fee.
Another study was conducted by Kusharyanti
(2012) with the title “Analysis of the Factors
Determining the Audit Fee”. The independent
variables used in this study were client size, audit
complexity, audit risk, audit committee, client’s
financial condition, size of the public accounting
firm, audit tenure, and audit specialization, while the
dependent variable used was audit fee. The results of
this study suggest that client size, audit complexity,
audit risk, audit committee, client’s financial
condition, and size of the public accounting firm
have a significant effect on the determination of the
audit fee, while audit tenure and audit specialization
do not have any significant effect in determining the
audit fee.
Jemada and Yeniartha (2013) conducted a study
entitled “Influence of Time Budget Pressure,
Complexity of Duties, and Reputation of Auditor to
Audit Fee at Public Accounting Firm in Bali”. The
results of this study show that time budget pressure,
task complexity, and the reputation of the auditor
positively and significantly affect the audit fee at a
public accounting firm in Bali.
Finally, Akhtarudin et al. (2016) examined
internal control deficiencies, opportunity investment,
and audit fees. The results show that the increment
of audit fee designates a supplemental cost that firms
should bear when they are growing and the internal
control mechanism is reported ineffectual.
Audit risk consideration is required in
international audit standards but the focus of this
research is whether components in audit risk such as
inherent risk, control risk, and detection risk are
respectively the responsibility of the auditor or
auditee because there are some risks that are
inherent to the auditor, and risks to which the
auditee is responsible, therefore, researchers want to
discuss this topic.
Therefore, this research intends to find out
whether audit risks such as inherent risk, control
risk, and detection risk can affect the amount of
audit fees offered by CPA firms.
2 THEORETICAL
BACKGROUND
2.1 Agency Theory
Agency theory is a theory composed by Jensen and
Meckling in 1976 that defines that there is an agency
relationship between two parties in which the first
party, as the principal, delegates the decision-
making authority to the second party, that is, the
agent. Agency theory refers to three basic
assumptions of humans: self-centeredness, limited
thought about the view of the future, and risk
aversion (Eisenhardt, 1989).
As Fachriyah (2011) assumes, an auditor is
trusted by the community as an independent party
who can provide assurance for client’s financial
statements. Since companies use the services of
auditors through public accounting firms in
providing independent opinions on financial
statements, there is a monitoring cost in the form of
external audit fees.
2.2 Audit Concept
An audit is an accumulation of evaluation activities
on evidence and information in determining and
reporting the level of conformity between stable
information and criteria, and audit procedures are
required to be performed by third parties who adhere
to the professional code of ethics (Arens et al.,
2011).
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
38

The general purpose of auditing, according to
Boynton and Johnson (2006), is to express an
opinion on fairness in all material respects, financial
position, and business results in accordance with
generally accepted accounting principles. The
purpose of the audit is specifically based on the
assertions that have been made and signed by the
management listed in the financial statements.
In preparing an audit plan, the auditor should
consider what audit risks are. Tuanakotta (2015)
defines audit risk as the risk of providing an
inappropriate audit opinion on mismanaged financial
statements.
According to SAS 47 (audit risk and materiality
in conducting an audit), audit risk is a risk arising
because the auditor unwittingly did not modify his
or her opinion properly on a financial statement
containing material misstatements.
The audit fee is defined as the amount of the
service fee received by the external auditor for the
performance of the audit work. The reward is related
to the amount of time spent in completing their
work.
In Indonesia, the Indonesian Institute of Certified
Public Accountants (IAPI) published the rules
regarding audit fees, No. KEP.024/IAPI/VII/2008. It
is explained that in setting the audit fee, CPA firms
must consider client needs, legal duties and
responsibilities (statutory duties), independence,
level of expertise and responsibilities attached to the
work performed, as well as the complexity of the
work and the amount of time required by members
and staff to complete the work.
2.3 Hypotheses Development
2.3.1 Inherent Risk and Audit Fees
According to Arens (2006), the correlation between
inherent risk and audit evidence is directly
proportional. The higher the inherent risk that the
client’s entity has, the more audit evidence it
obtains. Accordingly, the fee received by public
accounting firms also increases. Simunic (1980)
indicates that entity size, audit risk based on the
current ratio, quick ratio, debt-to-equity ratio,
litigation risk, and audit complexity have a positive
effect on audit fee.
H1: High inherent risk is associated with higher
audit fees.
2.3.2 Control Risk and Audit Fees
Akhtarudin (2016) suggests that internal control
affects the audit fee. Internal control is a component
of assessing control risk. When the control risk
obtained by the client’s internal control is getting
higher, the audit scope becomes more complicated.
Therefore, the audit fee obtained by CPA firms
should also be higher.
H2: High control risk is associated with higher
audit fees.
2.3.3 Detection Risk and Audit Fees
Detection risk is a risk of material misstatement that
auditors fail to detect due to improper use of audit
procedures. High detection risk can be prevented by
adequate planning and supervision and also the
implementation of audit engagement in accordance
with the professional standards of the CPA.
Adequate supervision and implementation of the
audit in accordance with the standards of quality
control are obtained from internal training and
participation in continuous professional training
provided by professional organizations and higher
costs are paid by CPA firms. Therefore, the audit fee
should also be higher.
H3: High detection risk is associated with higher
audit fees.
3 RESEARCH METHODOLOGY
The approach in this study is a quantitative
descriptive method through associative research.
The researcher decided to use the associative
research method to find correlations and causal
relationships among variables (Sulistyanto et al.,
2006). According to Sugiyono (2005), associative
research has the ability to discover the relationship
between two variables or more.
3.1 Population and Samples
The population used in this study includes auditors
working at CPA firms in East Java, Indonesia. Using
a purposive sampling method, 86 auditors in
manager and partner positions filled and returned a
questionnaire so data could be processed further.
3.2 Operational Definitions
3.2.1 Inherent Risk
Inherent risk is the risk of vulnerability to the
assertion, including transaction type, account
balance, or disclosure of material misstatement
before considering related controls (Tuanakotta,
Does Audit Risk Affect The Audit Fee?
39

2015). Inherent risk measurement uses a Likert scale
of 1–5 to indicate the level of agreement to a
statement. We are using a few indicators such as the
nature of the client’s business, findings from
previous audits, transactions with related parties,
non-routine transactions, consideration of some
accounts, the client’s financial condition, and client
integrity.
3.2.2 Control Risk
Control risk is a risk of vulnerability to the assertion,
including transaction type, account balance, or
disclosure of material misstatement that is not
prevented or detected and corrected by the client’s
internal control (Tuanakotta, 2015). Control risk
measurement is conducted on a Likert scale of 1–5
to indicate the level of agreement to a statement.
Control risk is measured by how far the auditors
gain knowledge and understanding of an entity’s
internal control and also perform tests of
effectiveness on these internal controls.
3.2.3 Detection Risk
Detection risk is a risk of material misstatement that
auditors fail to detect due to improper selection and
implementation of audit procedures. High detection
risk can be prevented by adequate planning,
supervision, and implementation of audit
engagement in accordance with the CPA’s
professional standards (Tuanakotta, 2015). The
measurement uses a Likert scale of 1–5 to indicate
the level of agreement to a statement. Detection risk
is measured by auditors misapplying audit
procedures, misinterpreting the audit results, or not
picking the testing method properly.
3.2.4 Audit Fees
According to Al-Shammari et al. (as cited in
Fachriyah, 2011), the audit fee is defined as a
remuneration received by the CPA firm for the audit
engaged by the auditor. The audit fees are influenced
by several factors including client size, profitability,
complexity, client internal control, or auditor factors
such as location, size, and auditor’s reputation. The
measurement uses a Likert scale of 1–5 to indicate
the level of agreement to a statement.
3.3 Data Analysis Method
The researcher proposed a causality model for the
data analysis method. To test this model, the
researcher used a causality analysis technique, a
structural equation model by using base variance or
partial least square (PLS). The researcher used the
PLS model because it shows the causality
relationship between a dependent variable and three
independent variables when one or two of the
variables have at least one indicator.
3.4 Outer Model Measurement
In the PLS analysis technique, the measurement uses
an outer model and inner model. In this research,
outer model measurement was used with a loading
factor value for each indicator. The reflective size
was correlated when the value was more than 0.7
with the high construct. The researcher used a 0.5
outer loading value for the initial stage of the
development of the measurement scale; an outer
loading value of 0.50 to 0.60 is considered sufficient
by Chin (1998).
3.4.1 Validity Test
A measurement scale is valid if the measurement
scale performs what should be performed and
measures what should be measured (Kuncoro,
2003). Validity can be assessed by comparing the
square root of the average variance extracted (AVE)
values for each construct, then the AVE value must
be greater than 0.30 (Formel & Larcker, 1981).
3.4.2 Reliability Test
The testing technique is composite reliability, which
measures a construct and can be measured by two
different sizes: 1) internal consistency, 2)
Chronbach’s Alpha (Ghozali, 2006). If the reliability
is above 0.70, the statement or indicator can be
declared reliable.
3.5 Inner Model Measurement
This testing method defines how big the influence of
the independent and dependent variables are. The R-
square value (R
2
) is used in this measurement.
3.6 Hypothesis Testing
The hypothesis test design proposed by the
researcher is based on the research objective of the
hypothesis T-test whose function is to assess the
influence of independent variables separately. The
confidence level used is 95%, so the level of
precision or limit of inaccuracy is α = 5% = 0.05
with table value. Hypotheses 0 is accepted and
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
40

Hypotheses a is rejected if the p-value is smaller
than the α value. On the other hand, Hypotheses 0 is
rejected and Hypotheses a is accepted if the p-value
is greater or equal to the α value.
4 RESULTS AND DISCUSSION
4.1 Outer Model Measurement Result
4.1.1 Validity Testing
All tested variables had a discriminant validity value
greater than 0.30 and a p-value less than the
significant level of 0.05. It can be concluded that all
variables are valid and reliable.
Table 1: Discriminant validity measurement results.
Variable
Original
Sampling
P-values
Inherent Risk
0.405
0.000
Control Risk
0.725
0.000
Detection Risk
0.701
0.000
Audit Fee
0.576
0.000
4.1.2 Reliability Testing
All tested variables had a composite reliability value
greater than 0.70 or had a p-value smaller than the
significant level of 0.05. Accordingly, it can be
concluded that the overall variables tested are
reliable for further testing and analysis.
Table 2: Composite reliability measurement results.
Variable
Original
Sampling
P-values
Inherent Risk
0.859
0.000
Control Risk
0.888
0.000
Detection Risk
0.874
0.000
Audit Fee
0.890
0.000
4.2 Inner Model Measurement Result
The audit fee variable had an adjusted R
2
value of
0.239. This figure shows that the audit fee service
variable can be explained by as much as 23.9% by
the independent variables used by the researcher
such as inherent risk variable, control risk variable,
and detection risk variable.
Table 3: Adjusted R
2
Value
Endogenous Variable
Adjusted R
2
Value
Audit Fee
0.239
4.3 Hypothesis Testing Results and
Discussion
Table 4: Statistical Test Results of Inter-Variable
Relationships.
Hypothesis
Original
Sample (O)
t-statistic
(|O/STER
R|)
p-
values
H1
0.217
2.292
0.022
H2
0.280
2.526
0.012
H3
0.183
1.687
0.092
In the PLS analysis technique based on the t-
statistic test, it can be concluded that the inherent
risk variable influences the audit fee based on p-
values of 0.022 (which is under 0.05). This result is
supported by Simunic’s (1980) studies. The second
variable tested is the control risk variable. It can be
concluded that the control risk affects the audit fee
based on p-values of 0.012, which is below the 0.05
significance level. According to the regression
coefficient value result of 0.280, it can be concluded
that control risk has a positive effect on the audit fee.
The same results are also supported by Akhtarudin’s
(2016) research. The last variable tested is the
detection risk variable. It can be stated that detection
risk does not affect the audit fee. This is because the
p-values are 0.092 (below 0.05). It can be concluded
that the detection risk has no effect on the audit fee.
This indicates that the third hypothesis that states the
detection risk has an effect on the audit fee is not
proven.
Does Audit Risk Affect The Audit Fee?
41

The results of this study indicate that inherent
risk and control risk affect the determination of audit
fees. This proves that inherent risk and control risk
become crucial factors in determining audit fees.
High control risk causes auditors difficulties in
detecting material misstatement due to a limitation,
that is, the weakness of the client’s internal control
system. Inadequate internal control implies that the
client has a high control risk. Hence, public
accounting firms should set a higher fee for a client
with higher level of control risk than for a client
with a moderate or low level of control risk.
On the other hand, the detection risk does not
affect the determination of the audit fee. The
detection risk arises from the failure of the auditor to
detect a material misstatement. Detection risk is
controlled entirely by the auditor. Therefore, the
auditor should reduce the detection risk to the
reasonable level since the detection risk is the
responsibility of the auditor.
5 CONCLUSIONS
The results of this study indicate that inherent risk
and control risk affect the determination of audit
fees. This proves that inherent risk and control risk
become crucial factors in determining audit fees. On
the other hand, detection risk does not affect the
determination of the audit fee. The detection risk
arises from the failure of the auditor to detect a
material misstatement.
Meanwhile, this study has several limitations.
First of all, the researcher only used samples from
CPA firms in East Java, so the results cannot be
generalized to other CPA firms. Secondly, not all
CPA firms in East Java were willing to fill out the
questionnaire. Moreover, the researcher only used
inherent risk, control risk, and detection risk as
independent variables in determining the audit fee,
while there are other factors that may also influence
the amount of the audit fee that are not included
such as client business risk, time budget pressure,
and auditor reputation.
REFERENCES
Akhtarudin, M. and Jonathan, O. (2016). Internal control
deficiencies, investment opportunities, and audit fees.
Int. J. Accounting and Finance. 6 (2).
Arens et al. (2012). Auditing and assurance services: An
integrated approach. 14
th
edn. New Jersey: Pearson –
Prentice Hall Inc.
Chin, W. (1995). Partial least square is to LISREL as
principal components analysis is to common factor
analysis. Technology Studies, 2, 315-319.
Eisenhardt, M. (1989). Agency theory: An assessment and
review. Academy of Management Review. 14 (1), 57-
74.
Fachriyah, N. (2011). Faktor-faktor yang Mempengaruhi
Penentuan Fee Audit oleh Kantor Akuntan Publik di
Malang. Unpublished thesis. Malang: Universitas
Brawijaya.
Ghozali, I. (2006). Aplikasi analisis multivariate dengan
program SPSS. Semarang: Badan Penerbit Undip.
Herawaty, N. (2011). Pengaruh pengendalian intern dan
lamanya waktu audit terhadap fee audit (Studi kasus
pada KAP Kota Jambi dan Palembang). Jurnal
Penelitian Universtas Jambi Seri Humaniora ISSN
0852-8349. 13 (1), Januari-Juni 2011, 07-12.
Jemada, V. and Yaniartha, S. (2013). Pengaruh tekanan
anggaran waktu, kompleksitas tugas, dan reputasi
auditor terhadap fee audit pada kantor akuntan publik
(KAP) di Bali. E-Jurnal Akuntansi Universitas
Udayana ISSN 2302-8556. 3 (3), 132-146.
Jensen, C. and Meckling, H. (1976). The theory of the
firm: Managerial behavior, agency cost, and
ownership structure. Journal of Financial Economics.
3(4), 305-360.
Keputusan Institut Akuntan Publik Indonesia Nomor:
024/IAPI/VII/2008 tentang Kebijakan Penentuan Fee
Audit. Tanggal 2 Juli 2008.
Kusharyanti. (2012). Analysis of the factors determining
the audit fee. Jounal of Economics, Business, and
Accountancy Ventura. 16 (1), April 2013, 147-160.
Simunic, A. (1980). The pricing of audit services: Theory
and evidence. Journal of Accounting Research. 22 (3),
161-190.
Sugiyono. (2005). Metode penelitian pendidikan:
Pendekatan kuantitatif, kualitatif, dan R&D. Bandung:
ALFABETA.
Sulistiyanto, S. and Susilawati, C. (2006). Pedoman
penulisan skripsi. Semarang: Penerbit Universitas
Soegijapranata dan Pusat Pengkajian dan
Pengembangan Akuntansi.
Suharli, M. and Nurlaelah. (2008). Konsentrasi auditor
dan penetapan fee audit: Investigasi pada BUMN.
JAAI. 12 (2), Desember 2008, 133-148.
Tuanakotta, T. (2013). Audit berbasis ISA. Jakarta:
Salemba Empat.
Tuanakotta, T. (2015). Audit kontemporer. Jakarta:
Salemba Empat.
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
42