Modeling the Relationship between Auditor and Client Entity using Game Theory and Nash Equilibriums

Author:Univ. Prof. Emil HOROMNEA, Ph. D.; Florentin-Emil TANASĂ, Ph. D. Student

JEL:M42, C72

DOI:

Keywords:Nash equilibrium, financial audit, professional accountant, auditor-client entity relationship, pay-off matrix

Abstract:
This study aims to identify factors influencing the usefulness of services provided by professional accountants in correlation with strategies adopted by client entity during auditing of financial statements. There were also examined the behavior of involved actors. This study s started from Fellingham and Coate’s theoretical models regarding the relationship between auditor and client entity. In order to offer a practical approach, the authors developed a questionnaire concerning the way of thinking of participants involved in auditing financial statements and creating their pay-off matrices. The possible types of decisions have been identified with the help of Nash equilibrium and game theory. The conclusions show that one in five cases the client entity is preparing incorrect financial statements. Also there is a probability of one in ten cases for an efficient audit and lower costs in parallel with preparing correct financial statements.\r\n

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