This thesis investigates the relation between financial distress of firms and audit fees. We provide an extensive analysis of prior literature dealing with the incorporation of firmsÕ default risk in audit pricing models by reviewing more than 200 audit pricing studies. In contrast to previous studies, which strongly focus on specific financial statement items and accounting-based default risk models for proxying default risk, this study is the first applying a market-based contingent claims approach that is based on the Merton (1974) model.