Timing of Verification Procedures: Monitoring versus Auditing

This paper studies the strategic effect of a difference in timing of verification in an agency model. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem, there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability. verification in an agency model. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem, there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability

Improvement of the Model of Using Analytical Procedures at Internal Auditing of a Bank

From 2014 the number of banks in Ukraine essentially decreased from 180 to 76 for 01.07.2019. The unstable situation was traced in the country for this period of time. Liquidation of 104 banks demonstrated that they couldn't manage their risks and make correct managerial decisions timely, and also the system of internal control functioned badly. Just this system includes a subdivision of internal auditing that didn't cope with timely revelation of inexactitudes, so reasonable recommendations as to managerial decisions weren't elaborated. For providing functions of internal auditing of a bank, the subdivision uses auditing procedures. They include analytical procedures that, in their turn, are principal for attaining aims of an auditing task. The article considers most urgent questions of using analytical procedures in internal bank auditing. The essence of the definition of “analytical procedures” has been considered and specified. Analytical procedures have been separated from the composition of auditing ones, and their theoretical aspect has been analyzed. The classification of methods of analytical procedures has been analyzed for getting auditing evidences. Analytical procedures consist of methods of internal system estimation and bank financial condition analysis and also analysis of their business-processes. Advantages and defects of methodical components of analytical procedures have been presented and analyzed. The stages of an auditing task have been studied. Analytical procedures are considered at three stages of internal auditing: planning, performing the engagement and resulting, demonstrated through the prism of economic analysis. International standards of the professional practice of internal auditing that regulate it are considered. Questions of working papers that generalize a result of using analytical procedures are separated

Auditing: Active Learning with Outcome-Dependent Query Costs

We propose a learning setting in which unlabeled data is free, and the cost of a label depends on its value, which is not known in advance. We study binary classification in an extreme case, where the algorithm only pays for negative labels. Our motivation are applications such as fraud detection, in which investigating an honest transaction should be avoided if possible. We term the setting auditing, and consider the auditing complexity of an algorithm: the number of negative labels the algorithm requires in order to learn a hypothesis with low relative error. We design auditing algorithms for simple hypothesis classes (thresholds and rectangles), and show that with these algorithms, the auditing complexity can be significantly lower than the active label complexity. We also discuss a general competitive approach for auditing and possible modifications to the framework.Comment: Corrections in section

Timing of Verification Procedures: Monitoring versus Auditing

This paper studies the strategic effect of a difference in timing of verification in an agency model. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem, there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability. verification in an agency model. A principal may choose between two equally efficient verification procedures: monitoring and auditing. Under auditing the principal receives additional information. Due to a double moral hazard problem, there exists a tension between incentives for effort and incentives for verification. Auditing exacerbates this tension and, consequently, requires steeper incentive schemes than monitoring. Hence, auditing is suboptimal if 1) steep incentives structures are costly to implement due to bounded transfers, or 2) steep incentive schemes induce higher rents due to limited liability.timing of verification; double moral hazard; monitoring; auditi

Optimal auditing and insurance in a dynamic model of tax compliance

We study the optimal auditing of a taxpayer's income in a dynamic principal-agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can under-report his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly auditing technology, we show that the optimal auditing mechanism in our model consists of cycles. Within each cycle, a low-income taxpayer is initially unaudited, but if the duration of low-income report exceeds a threshold, then the auditing probability becomes positive. That is, the tax authority guarantees that the taxpayer will not be audited until the threshold duration is reached. We also find that auditing becomes less frequent if the auditing cost is higher or if the variance of income is lower.Tax compliance, tax auditing, stochastic costly state verification

Optimal auditing and insurance in a dynamic model of tax compliance

We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can underreport his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly and imperfect auditing technology, we show that the optimal auditing mechanism in our model consists of cycles. Within each cycle, a low-income taxpayer is initially unaudited, but if the duration of low-income reports exceeds a threshold, then the auditing probability becomes positive. That is, the tax authority guarantees that the taxpayer will not be audited until the threshold duration is reached. We also find that auditing becomes less frequent if the auditing cost is higher or if the variance of income is lower.Tax auditing ; Taxation

Auditing Knowledge

{Excerpt} A knowledge audit can have multiple purposes, but the most common is to provide tangible evidence of what knowledge an organization needs, where that knowledge is, how it is being used, what problems and difficulties exist, and what improvements can be made. Although there can be no blueprint, a typical knowledge audit will—not necessarily at the same time or level of detail—query the following: • What are an organization’s knowledge needs? • What tacit and explicit knowledge assets does it have and where are they? • How does knowledge flow within the organization, formally and informally, and to and from clients and relevant organizations? • How is that knowledge identified, created, stored, shared, and used? • What obstacles are there to knowledge flows, e.g., to what extent do its people, business processes, and technology currently support or hamper the effective movement of knowledge? • What gaps and duplications exist in the organization’s knowledge