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Unformatted text preview: and the lowest probability of detecting fraud), Nash (middle audit), and defensive (highest audit). The three options for each player lead to nine possible audit/fraud
combinations. The top part of each cell shows the manager’s expected payoff along with
the two possible payoffs and the associated probability of each payoff. The bottom part of
each cell shows the auditor’s payoffs and probabilities. I constructed the payoff matrix by
specifying a model that incorporates the frictions discussed below. The details of the model
are available upon request.
Suppose an auditor selects the trust audit and the manager selects the cooperate fraud
level (trust/cooperate combination). Under this combination, the manager’s expected payoff
is 46.82, which is a weighted average of two possible payoffs. Speciﬁcally, when the auditor
detects fraud, the manager receives a payoff of 30.43 (i.e., he pays 30.43). This occurs
29 percent of the time under this choice combination. The manager receives a payoff...
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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