Using Game Theory to Encounter Management Practices in Managing Audits -An Experimental Study

Abstract

The current study aims to support auditors in interpreting the predictions of the game theory, which is used for dealing with conflicts and decision making. Also, this study explores different sets of tactics employed by the client to conceal intentional misstatements included in the financial statements. This study uses signaling games as game solution. Signaling games, one of the game theory models that apply private information where one of the players knows nature's move, and the other player try to predict such move. A semi-controlled lab experiment is conducted. Data collected for the experiment was from Egyptian auditors working for the Big-4, Non-Big-4 auditing firms and Egyptian Accountability State Authority through an online instrument. Findings from the experiment suggest that as the client exercises diversionary managing audit tactics to conceal intentional misstatements significantly and adversely affects the audit effectiveness and significantly affect the auditor’s judgment. While exercising distraction, managing audit tactics significantly and adversely affects the audit effectiveness only. It is recommended to apply industry specialization as a moderator variable to get more insights into the auditor's detection effectiveness.