（2000）The role of audit technology and extension of audit procedures in strategic auditing.pdfVIP

THE ROLE OF AUDIT TECHNOLOGY AND EXTENSION OF AUDIT PROCEDURES IN STRATEGIC AUDITING ASHUTOSH DESHMUKH Pennsylvania State University, The Behrend College ABSTRACT: This article develops game-theoretic hidden action models for examin- ing the role of noisy audit technology and the extension of audit procedures in deter- ring material irregulan ’ties. We model two different types of games: (1) a game in which the auditor makes the accept/reject decision after the primary audit, by some- times going contrary to the audit signal, and (2) a game in which the auditor makes the accept/reject decision afrer the primary audit or after extending the audit. Nash strate- gies are analyzed, and the equilibrium behavior involves mixed strategies on the part of the auditor and the auditee. The key results of this analyses are: (1) increasing preci- sion in audit effectiveness may result in increasing material irregularities, and (2) the increase in material irregularities can be avoided tf the audit technology, that is, audit effectiveness and audit eficiency, exceeds the required cn ’tical values. 1.O INTRODUCTION Theresponsibility of the independent auditor to detect management fraud is a controver- sial issue worldwide. American Institute of Certified Public Accountants recently issued a new Statement on Auditing Standard (SAS) No. 82 titled “Consideration of