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Evidence of Fraud, Audit Risk and Audit Liability Regimes

Author

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  • Evelyn Patterson

    (State University of New York at Buffalo)

  • David Wright

    (University of Michigan Business School, University of Michigan)

Abstract

We investigate the effectiveness of proportionate liability in reducing the probability of fraud and audit risk relative to joint and several liability in two strategic audit settings: one that provides conclusive evidence of fraud and one that provides inconclusive evidence of fraud. In both settings the auditor makes an audit effort choice, but in the second setting the auditor also evaluates the audit evidence. Our results show that when the auditor chooses only effort, a proportionate liability rule with large marginal liability relief decreases audit risk. However, when the auditor also evaluates the audit evidence this result no longer holds.

Suggested Citation

  • Evelyn Patterson & David Wright, 2003. "Evidence of Fraud, Audit Risk and Audit Liability Regimes," Review of Accounting Studies, Springer, vol. 8(1), pages 105-131, March.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:1:d:10.1023_a:1022652023592
    DOI: 10.1023/A:1022652023592
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    References listed on IDEAS

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    1. J. Reed Smith & Samuel L. Tiras & Sansakrit S. Vichitlekarn, 2000. "The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud," Contemporary Accounting Research, John Wiley & Sons, vol. 17(2), pages 327-356, June.
    2. Patterson, Er, 1993. "Strategic Sample-Size Choice In Auditing," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 31(2), pages 272-293.
    3. David R. Finley, 1994. "Game Theoretic Analysis of Discovery Sampling for Internal Fraud Control Auditing," Contemporary Accounting Research, John Wiley & Sons, vol. 11(1), pages 91-114, June.
    4. Narayanan, Vg, 1994. "An Analysis Of Auditor Liability Rules," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32, pages 39-59.
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    Cited by:

    1. Haijin Lin & David E. M. Sappington, 2015. "Welfare-enhancing fraudulent behavior," Review of Accounting Studies, Springer, vol. 20(1), pages 343-370, March.

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