Unformatted text preview: of the time across
all three fraud levels. Constant percentages across fraud levels imply that audit effectiveness
does not depend on the size of the fraud; that is, more fraud does not increase the probability
of detection. However, the probability auditors detect fraud increases with the audit level.
This, in turn, raises the probability of managerial sanctions. The auditor detects the manager’s fraud 29 percent of the time under the trust audit, increasing to 42 percent and 53
percent for the Nash and defensive audits, respectively. 270 The Accounting Review, April 2002 Characteristics of Auditor Payoffs
The Audit Level Determines the Probability That the Auditor Pays a Penalty
The probability that the auditor pays a penalty for failing to detect fraud decreases with
higher audit levels. Under the trust audit, the auditor is penalized 19 percent of the time.
The percentage decreases to 16 percent and 13 percent for the Nash and defensive audits,
respectively. Again, these percentages may not correspond to real-world probabilities of
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This note was uploaded on 01/27/2014 for the course ACCY 405 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.
- Fall '08