The Relationship Between Financial Risk and Audit Quality with an Emphasis on the Role of Business Risk

Subject Areas :

وحید منتی ^{1 *} , Hamideh Asna Ashari ² , Mohammad Rajabnia Chenari ³

1 - دانشجوی دکتری دانشگاه تهران، تهران ، ایران.
2 - Assistant professor of Management and Accounting Shahid Beheshti University.Tehran. Iran
3 - Shahid Beheshti University

Received: 2022-10-29 Published : 2025-09-06

Keywords: Audit Quality, Loss Aversion, Business Risk, Risk Aversion, Experimental Economics,

Abstract :

This study uses experimental economic markets to investigate the impact of business risk and the financial risk on auditor selection. This study studies these factors because they are ubiquitous to companies, and focuses on their influence on managers because managers continue to play a significant role in the auditor hiring process and we know relatively little about their auditor preferences. The research method used is the experimental method and a sample of 150 students and graduates of national universities in Tehran in 2021 has been studied to test the hypotheses. This study predicts business risk, the financial risk, and their interaction will each decrease manager demand for high audit quality due to a desire to achieve greater misreporting. Experimental results are consistent with predictions except for one case; specifically, increased business risk and the financial risk, each alone, significantly reduce managers’ likelihood of hiring the best available auditor in the market, but their interactive conditions do not have a significant effect on audit quality. Two contextual factors indicate that this reduction in audit quality demand leads to increases in misreporting. Finally, the impact of audit quality on investors was investigated and it showed that lower audit quality in a company can harm investors.