We examine the effect of changes in the regulatory environment on the conduct of financial statement audits
in a European setting. These changes include the adoption of risk-based auditing, new Audit Risk Standards
and increased scrutiny of audit quality by a new, co-ordinated oversight body in each Member State. We
investigate this by analysing the audit hours and fees and their determinants for clients of Big N audit firms
in Finland in 1996 and 2010. Our results show that audit fees and audit effort by senior auditors were
generally higher for high risk clients in 2010 than in 1996. Second, we find that the relationship in 1996
between the client being owner-managed and lower audit hours for both senior and junior auditors is absent
in 2010. This supports our argument that the increased auditor scepticism has increased audit effort for
owner-managed firms. Third, we find that the average number of junior staff hours increased between 1996
and 2010, but the variance across engagements declined. In contrast, senior auditor hours (and total audit
hours) decreased, but the variance across engagements increased. This supports the view that risk-based
auditing has increased the efficiency of audits. However, it suggests that the general increase in regulation
and the tightening of audit standards, reinforced by the new quality inspections, have led to less emphasis
on processes requiring professional judgment and more emphasis on compliance with rules. These
unintended consequences should be of interest to the auditing profession and policy makers
