The role of audit technology and extension of audit procedures in strategic auditing

This article develops game-theoretic hidden action models for examining the role of noisy audit technology and the extension of audit procedures in deterring material irregularities. We model two different types of games: (1) a game in which the auditor makes the acceptlreject decision after the primary audit, by sometimes going contrary to the audit signal, and (2) a game in which the auditor makes the accept/reject decision after the primary audit or after extending the audit. Nash strategies 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 precision in audit effectiveness may result in increasing material irregularities, and (2) the increase in material irregularities can be avoided if the audit technology, that is, audit effectiveness and audit efficiency, exceeds the required critical values.