State-Dependence and Conditional Audit Policy - Theoretical Economics Letters

TEL > Vol.3 No.5, September 2013

State-Dependence and Conditional Audit Policy ()

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DOI: 10.4236/tel.2013.35A2005 2,892 Downloads 4,536 Views Citations

Author(s)

Ruey-Ji Guo, Yenpao Chen, Chun Chen Lee

Affiliation(s)

Department of Accounting, Soochow University, Taipei City.

ABSTRACT

This paper investigates how the state-dependence between two periods affects the optimal audit decision. Using a principal-agent model, based on a state-dependent assumption, we find that it is desirable to use a conditional (punitive) audit mechanism when the agent’s under-declaration benefit is significant and the principal’s audit cost is moderate. In that case, the audit policy for the current period will be contingent on the audit result in the preceding period.

KEYWORDS

Information Asymmetry; Agency Problem; Audit Policy

Share and Cite:

R. Guo, Y. Chen and C. Lee, "State-Dependence and Conditional Audit Policy," Theoretical Economics Letters, Vol. 3 No. 5B, 2013, pp. 22-30. doi: 10.4236/tel.2013.35A2005.

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