Economics of Auditing

Introduction

The course "Economics of Auditing” is not about “how” audits are done, but primarily about “why” there are audits and how auditors’ and audit clients’ decisions depend on each other. From an economic perspective, accounting can be regarded as an information system whereat auditing provides assurance over the respective information. However, an audit should not be regarded as some form of technology but auditors make (some form of utility maximizing) decisions. The main objective of this research-oriented course is (1) to analyse the economic role of the audit and its beneficial (and potentially harmful) economic effects and (2) to analyse how auditors, audit clients, and addressees of audited financial statements interact. The analyses are primarily based on formal-theoretical models; however, empirical studies are also considered.

Course content

The lecture covers the following topics:

• Stewardship, information, and insurance hypotheses
• Costs and benefits of auditing
• Demand for and supply of audits
• Optimal contracts and moral hazard in auditing frameworks
• Optimal audit procedures and strategies
• Quality of audited financial statements
• Auditor liability
• Auditor independence
• Audit market regulations