State-Dependence and Conditional Audit Policy

Ruey-Ji Guo, Yenpao Chen, Chun Chen Lee

Department of Accounting, Soochow University, Taipei City.

DOI: 10.4236/tel.2013.35A2005                

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

Conflicts of Interest

The authors declare no conflicts of interest.

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