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Strategic Auditing: An Incomplete Information Model
Author(s) -
Cheng Peter,
Childs Bradley D.,
Sheng William W.
Publication year - 2001
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00387
Subject(s) - stylized fact , audit , accounting , business , inherent risk (accounting) , auditor's report , computer science , external auditor , economics , internal audit , macroeconomics
This paper presents a stylized model of the strategy game between the auditor and the client. The client is assumed to have either good or bad inherent risk in her reporting system. She chooses a reporting effort level to maintain the accounting records and data management depending on her type of inherent risk. The auditor chooses a high or low level of audit procedures. A high level of auditing procedures will reveal the client's type and effort from which the auditor can decide either to qualify the financial statements or to issue a clean report. The client and the auditor are assumed to move simultaneously. Pure strategy equilibria are derived for all the undominated strategies between the auditor and the client in the region of the model that is more similar to the Fellingham and Newman (1985) model. Unlike their model in which a high auditing level is never a pure strategy in equilibrium, we obtain pure strategy equilibria for high auditing levels.