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Title: Analysis of influence of cost on strategic choice of auditee/auditor
Author: Nadeau, Luc
Awarding Body: University of Edinburgh
Current Institution: University of Edinburgh
Date of Award: 1993
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The audit of financial statements is set out as a two person game to illustrate the influence of damages imposed by society on the strategic choice of both auditee and auditor. It is assumed: (1) that society can influence the damages regime for the auditee and the auditor; (2) that society might be prepared to restrict damages if the auditor can demonstrate due diligence; (3) that the auditee can vary his level of care as regards the accounting process; (4) that the auditor controls his choice of qualitative and quantitative audit tests and the form of audit report; and (5) that there is uncertainty about material error. There are costs and damages involved. The expected cost is the direct cost of preparing and carrying out the audit of the financial statements plus possible damages incurred by both auditee and auditor whenever the quality of the financial statements and audit are challenged. The highest damages are for the issue of a non-qualified audit report on materially inaccurate financial statements, and the primary focus of the dissertation is to demonstrate how these particular damages influence the strategy of the auditee and the auditor. Two types of game are considered. The first illustration is of a game in which the auditee and the auditor cooperate to find the combined strategy that minimizes the total expected cost. The second illustration is of a game in which the auditee and the auditor do not cooperate. In this case, the joint strategies are found by using the concept of Nash equilibrium. These illustrations demonstrate that: (1) for both cooperative and non-cooperative games, the level of damages determines the auditee and the auditor strategies; (2) if society wishes to give an inducement in the form of restricting damages in order to encourage maximum effort, the size of the required inducement is less for a cooperative than for a non-cooperative game; and (3) there are some levels of inducement which encourage maximum effort irrespective of whether the auditee and the auditor cooperate.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available