An inspection of the payoff matrix shows that the

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Unformatted text preview: ch determines the probabilities of each payoff). The auditor’s expected payoffs depend on the fraud level (when the auditor is penalized) and his audit level (which affects the cost of producing the audit and the probabilities of each payoff). An inspection of the payoff matrix shows that the manager has incentives to cheat when expecting the auditor to trust; to select the Nash audit when expecting the auditor to select the Nash audit; and to cooperate when expecting the defensive audit. Auditors prefer the trust audit when expecting the manager to cooperate; the Nash audit when expecting the Nash fraud level; and the defensive audit when expecting the manager to cheat. Thus, the manager’s best response is the off-diagonal and the auditor’s best response is the diagonal. The Nash equilibrium of this audit trust game is the center cell of the matrix (Nash audit/Nash fraud). This outcome represents the solution in which each player best responds to his or her anticipation of the other player’s choice, and neither party has a unilateral incentive...
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