The two possible payoffs are independent of the audit

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Unformatted text preview: are either 30.43 or 78.34. These payoffs are constant across the three audit levels, although the expected payoffs change because higher audit levels increase the probabilities that the auditor detects the fraud. The two possible payoffs are independent of the audit level because the audit fee is fixed— simplifying the setting. When the manager commits higher levels of fraud, his range of possible payoffs expands. Under the Nash fraud level, the manager’s payoffs are 68.64 or 110.74, and under the cheat fraud level they are 113.75 or 139.29. These differential payoffs across fraud levels reflect that low levels of fraud result in smaller sanctions against the manager when the auditor detects fraud and also that low levels of fraud provide the manager a relatively small payoff if the auditor does not detect the fraud (lower risk; lower reward). The Audit Determines the Probability of Each Payoff for the Manager, but the Probabilities Are Constant across Fraud Levels Under the trust audit level, the manager faces sanctions 29 percent...
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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.

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