The last decades have seen a dramatic increase in auditing standards and litigation against auditors. This paper introduces a model of the market for audit services in which auditors differ in their levels of skill, where differences in levels of skill capture differences in knowledge or audit technology. Litigation is endogenous and captures some of the institutional characteristics of litigation in the UK. The paper derives auditors' levels of skill and other parameters characterizing the legal environment such as auditing standards, trial awards, and litigation costs. It shows how the grow value of an audit is related to auditing standards and analyzes auditors' attitudes towards auditing standards as a function of their level of skill.
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