In this paper we analyze the effect of audit firm size on audit fees.' An economic model is developed using an agency framework, taking into consideration the uncertainties involved in the audit process and the auditor's incentives. Optimal fee schedules are derived for a fixed level of audit effort.2 If clients can perfectly observe audit effort, fees will be paid for the actual level of audit effort. This is the first-best contract between client and auditor. However, if auditors are effort averse and their actions are