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Evidence of Fraud, Audit Risk and Audit Liability Regimes

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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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