Audit Game Analysis, Internal Control And Its Impact

In recent years, many financial scandals and auditing failures have broken out worldwide. One important reason is that those enterprises didn't have well-designed and effective internal control so that management could override controls and cheat easily. Another important reason lies in the auditor's part. In the auditing failures, CPAs took little account of internal control analysis and appraisal so that audit risk could not be controlled effectively. Internal control not only plays a critical role in an enterprise's survival, development, and achievement of organization goal, but also is a key factor which affects the efficiency and economy of the CPA's work.This thesis firstly researches into internal control related theory and practice, analyses the current situation and limitation of China's internal control and consequently puts forward the author's proposal regarding how to improve present situation. Secondly, this thesis comparatively analyses theoretical development history of auditing and internal control, discusses the importance of internal control to auditing and some practical issues with regard to the application of internal control appraisal in auditing. After analysing internal control from the subject of internal control, i.e. enterprise's point of view and from the subject of auditing, i.e. CPA's point of view, this thesis takes advantage of game theory methodology to make researches on the impact of internal control on auditor-management games. The game theory analysis contains two parts: the first part is mainly concerned about three static auditing game models. By comparative static analysis, this part discusses how strong and weak internal control affect the two players decision making and the Nash equilibria of the auditing games. The second part uses a dynamic auditing game model including the internal control designer, which is supposed to be the board of directors, as the first-move player and discusses how the board of directors makes its decision when designing the enterprise's internal control.