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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.


Information Asymmetry; Agency Problem; Audit Policy

Cite this paper

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.

Author: Ruey-Ji Guo, Yenpao Chen, Chun Chen Lee



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