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Title: Signalling game models of the auditing process
Author: Cook, Jonathan
Awarding Body: University of Edinburgh
Current Institution: University of Edinburgh
Date of Award: 1997
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Theoretical auditing models have recently changed from a single-person to a multi-person setting. This change has been prompted by the inability of decision theory to recognise that the manager has the potential to influence the outcome of the audit. One of the motivating factors for audit work is the auditor's uncertainty about the rate of error or fraud occurrence. This is incorporated in the Audit Risk model in the "inherent risk" term, which has only been considered in a decision-theoretic setting. A game theoretic consideration leads to a signalling game. Two models of the audit are developed to consider settings of both error detection and fraud prevention. In the model of error detection the players' actions include the effort put into maintaining the internal control system and investigation of these controls by the auditor followed by substantive testing and qualification. The efforts of changes in the players' outcome costs on the number and type of equilibrium pairs is investigated. The model is shown to have the following properties; Costly information acquisition can form part of a pure strategy equilibrium, and the manager can send signals that are conditional upon the inherent chance of errors occurring. An example is given to illustrate the above properties. This also shows that raising an outcome cost to encourage hard work can be counter-productive. Fraud and its detection do not occur in isolation. A model is therefore developed where fraud detection occurs against a background of unintentional errors. The auditor must divide his resources between error detection and fraud prevention. The manager is classified into two types by his difficulty in committing a fraudulent act. The manager has a choice over the level of effort to put into maintaining the internal control system and whether or not to commit a fraudulent act. The auditor chooses the level of substantive testing and subsequent in depth testing to carry out before issuing an audit report. It is shown that no equilibrium exist where the manager always reveals his type to the auditor.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available