Audit Game Instructions: please read
Assume that you are the sole decision maker for your small audit firm.
You will now make a series of decisions based on your audit firm's retained earnings.
You will make decisions over 5 rounds, where each round represents a new year.
Please make all choices as if you were deciding based on real money.
Your audit firm will start with capital holdings of 1,000,000 LabRands.
Your audit fee (received from your client) is fixed, at 500,000 LabRands each year, running for 5 years (rounds).
There is a 40% probability that the regulator will pull your client's file each year and perform an inspection. If an inspection is performed, and a material error is found (that is, an error resulting in an incorrect audit opinion) a fine of 700,000 LabRands will be issued, which you will have to pay.
You now have to make decisions about the amount you would like to invest in improving your audit process. Different investment amounts are associated with different risks of a material audit finding against you from the regulator, should your client's file be pulled for an inspection. Money invested in improved audit processes has immediate benefits in the relevant audit year only, as detailed below:
Investing nothing means that there is a 50% chance of a material audit failure, and a resulting fine if your client's file is pulled.
Investing 35,000 LabRands reduces this chance to 40% for the first year.
Investing 70,000 LabRands reduces this chance to 30% for the first year.
Investing 105,000 LabRands reduces this chance to 20% for the first year.
Please decide as if you will be paid based on your decision. To help with this, we will be randomly selecting 10 respondents to be paid in real money based on their decisions (note that all money amounts in the experiment choices are given in LabRands, where 5000 LabRands = R1). The payment will be based on your firm's final capital holdings (initial capital + retained earnings over the 5 rounds). Payments will be made via eWallet: if you would like to have the possibility of being selected to be paid based on your decisions, you will have the option to provide a phone number for this payment at the end of the experiment.