Using a panel data of both audit firms and listed firms in China from 2001 to 2003, we examine the continuous relationship between audit firm size and audit quality in China’s relatively competitive auditing market for publicly listed firms. We find that larger audit firms are more likely to issue modified opinions than smaller firms. We also find that larger firms tend to command significantly higher audit fees. Both evidences suggest the existence of not only a positive but a continuous relationship between audit firm size and audit quality. This relationship indicates that audit firms of varying size are not homogeneous in quality even in a relatively competitive market. The continuous relationship further suggests that such a size effect does not require a particular size threshold to operate.

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