Strategic Auditing for Organizations or Auditing Organizations’ Strategies?

A Challenge of Trade Secrecy and Economic Ethical Dilemma

Tamer A. Elnashar
Part-time faculty
School of Continuing Education
The American University in Cairo

Abstract: This paper shows mathematically the concept of strategic auditing that appeared in the 80s, 90s, and 2000s in the
auditing literature for financial auditing, but concerns instead the organizations’ strategies. I use a 2 × 2 games in the game
theory approach, compared with a decision tree and a Bayes' theorem approach to show the concept of strategic auditing and
its difference from the required auditing for the organizations’ strategies. I use in the game theory a mathematic payoff matrix
to predict the behavior of the organization’s managers and accountable members regarding the size of information about their
strategies that might be provided to the auditor to help make the auditing decision and in the meantime affected by the
challenges of organizations’ trade secrecy and economic ethical dilemma. The data for this paper is based on my estimation
of the weights required to calculate the probabilities for the game. In addition, I use a decision tree and Bayes' theorem approach
to compare its results to the results of the game theory regarding strategic auditing for organizations. The mathematical results
show that there is no strategy for the auditor can be the best strategy, and similarly, no strategy for the organization’s managers
and accountable members can be the best strategy, and the organization can use any of their strategies to provide information
about its strategies and the auditor as well can use any of his or her strategies to conduct the auditing or not to conduct the
auditing. Nevertheless, the results of the decision tree and Bayes' theorem approach show the expected value very close to the
value of the game but the organization is predicted to provide a large size of information regarding its strategies, and
subsequently, the auditor decides to conduct the auditing. the paper encourages future research to use different scenarios to
form the mathematic payoff matrix in the game theory and the decision tree and Bayes' theorem approach as tools to predict
the behaviors of organizations regarding providing their strategies information to the auditor to help the auditor plan for the
auditing process that might be required. Moreover, international auditing regulatory bodies need to set a conceptual framework
and set standards for auditing organizations’ strategies.

Keywords: strategic auditing, auditing organization strategies, trade secrecy, economic ethical dilemma, game theory,
probabilities.

I. INTRODUCTION AND BACKGROUND

Accounting and auditing textbooks for organizations ( hereinafter, organizations are all types

of organizations in the private sector and the government sector) do not present a clear definition for

strategic auditing for organizations. Nevertheless, strategic auditing for organizations was stated in the

80s, 90s and 2000s based on game theory research and Nash equilibrium, as tools or methods helping

the auditors to predict, in a probability manner, the behavior of the organizations’ managers and

accountable members in the auditing process, so that auditors can set several different strategies

presenting the probabilities of those managers and accountable members to take actions against or with

the auditors’ predictions, taking into account scenarios regarding the organizations’ hidden information

necessary for the auditing process in terms of auditing cost, auditors' analytical review procedures, as

well as audit sampling, in addition to other elements affecting the auditors’ decisions and auditing

process in general (e.g., Fellingham and Newman 1985; Wild and Biggs 1990; Cheng et al. 2001;

Chatterjee et al. 2008).

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 Afterward, strategic management accounting appeared in the accounting literature, to guide the

management for strategies to manage the cost of manufacturing and services, and to plan for the future

goals of the organizations related to competitive advantages needed to obtain cost leadership and

product differentiation in the market, and to achieve such strategic goals of the organization (e.g.

Horngren et al. 2015; Blocher et al. 2022).

To my knowledge, and after research, the game theory and its role in strategic auditing for

organizations has no previous implementation in the accounting literature to direct the strategic auditing

for organizations to focus on auditing the strategic goals of the organizations, cost management, cost

leadership, cost differentiation, and the competitive advantages strategies, Identically, is for the role

of strategic auditing for organizations that appeared in past work research, which is to help auditors set

the strategies when they anticipate the organizations’ behaviors of their managers and accountable

members’ hidden information, but not focusing on auditing the strategic goals of the organizations.

Therefore, new trends in research appeared to express the strategic auditing for organizations

as a tool to audit the organizations’ strategies instead of auditors predicting the organizations’ behaviors

regarding strategies information, which are financial and non-financial information that might be hidden

and not provided to the auditors by the organizations’ managers and accountable members (e.g., Lillis

and Lane 2007 and 2012; Wahl 2015; Kozak and Szanto 2017; Shiblea et al. 2020; Karim et al. 2020;

Abbas et al. 2020).

On the other hand, from the perspective of some researchers (e.g. Abdulameer et al. 2023; Hi

and Li 2023), strategic management as a science and art focuses on various aspects that cause the

auditing process to be expressed as strategic auditing for organizations, which is not similar to what I

express as auditing organizations’ strategies. Therefore, I recommend differentiating between both as

different types of auditing, where strategic auditing for organizations must be oriented to an

evolutionary perspective regarding the auditors’ trustworthiness towards the organizations’ members

from the top management levels to the lower management levels and regarding building trust in the

organizations’ members. Same as most people's judgments are linked to others in societies, they can be

applied to businesses and strategic auditing for organizations based on psychological matters between

the auditors and the actions of organizations’ members.

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 In reverse, from practitioners' and practical perspectives, auditing organizations’ strategies must

focus practically on auditing methods to ensure the right setting of organizations' strategies and assure

compliance with such organizations’ strategies related to the financial and non-financial aspects. The

majority of strategies that organizations focus on concern cost, cost management, finance, risk

management, economic problems, ethical consideration, new project acquisition, and joint venture, in

addition to the balanced scorecard aspects related to managing customer satisfaction, market share,

improve sales and quality of sales, align employee and organization goals. Additionally, auditing

organizations’ strategies focus mainly on new technologies, accounting results, financial analysis, and

financial planning.

Moreover, organizations are affected by International economic strategies concerning patterns

of trade to exchange benefits from goods and services, such as reducing the cost of production and

services, labor hours, and wage rate in order to have competitive prices and advantages and stand for

foreign competition. Therefore, the challenges that auditors usually face when thinking about auditing

and ensuring the rightness of the organizations’ strategies are related to the hidden information

organizations tend to hide, for trade secrecy purposes and the desire to have a monopoly position in the

national and international markets, which is considered an economic ethical dilemma, where on the

other side, monopolistic competitive companies must compete with others, and fairly attract customers

based on the companies products and services differentiation and cost leadership.

Thus far, I use in this paper a 2 × 2 game in the game theory approach, compared to a decision

tree and a Bayes' theorem approach, that considers the economic ethical dilemma for organizations’

strategies, where auditors can predict and set strategies for the attempt to audit the organizations'

strategies and predict the behaviors of the managers and the accountable members in the organizations,

organizations’ strategies are best found and guided by the elements in the balanced scorecard in the

strategic management accounting literature. This approach presents simply the concept of strategic

auditing in the light of game theory and probabilities similar to the previous research in the 80s, 90s,

and 2000s regarding the financial auditing of organizations, but without forming complicated

equations, and rather depending on website technologies for running operation research methods.

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 Moreover, the paper, implicitly, presents the absence of auditing principles to guide

practitioners and organizations towards auditing organizations’ strategies, subsequently, the game

theory and probabilities approach are helpful to the auditors to predict the behaviors of the

organizations’ managers and accountable members, when the auditors attempt to conduct audits for the

organizations’ strategies takes place. Therefore, international auditing regulatory bodies must consider

this type of absent auditing due to the economic ethical dilemma raised by managers and accountable

members in the organizations.

The remainder of this paper is organized as follows: section II presents the method used and

hypothesis, section III presents the results, and section IV presents the conclusions and discussion.

II. METHOD

The model and hypothesis

Auditing for organizations‘ financial aspects is regulated by international regulatory bodies as

one of the tools for safeguarding the organizations‘ assets and protecting the investors from being misled

by the organizations‘ unethical actions and disclosing misleading information. In the meantime,

organizations set their strategies apart from the auditing process internally and externally, and auditing

is based on a sampling process and analytical review procedures to plan for their auditing strategies and

decide whether to conduct the auditing for the organizations or not. Consequently, the auditing strategies

are based mainly on probabilities of the organizations reporting to financial performance in the first

place, but rarely, finding the auditors‘ strategies to conduct the auditing or not is based on the probable

organizations‘ strategies.

To that extent, I use a 2 × 2 two-person game of two players, player A is the auditor who has

two strategies, one is to plan for conducting the auditing based on the size of information the auditor

expects to obtain from the organizations’ management about their various and competitive strategies,

and the other is to not plan for such auditing. Both strategies are affected by the auditors’ prediction for

the strategies of player B, who are the managers and accountable members in the organization, regarding

the organization’s strategies for providing the information needed or not, whereas the organizations'

strategies are to provide to the auditor a small size of reported information, or medium size of reported

information, or large size of reported information. Despite the secrecy and confidentiality of such

4
information, the auditor has an opinion regarding the rightness of those strategies planned by the

organizations that can help interested parties make their investment decisions concerning those

organizations.

I use the website https://cbom.atozmath.com/CBOM/GameTheory.aspx?q=2xn as the tool to

prepare the 2 × 2 two-person game as the model used in this paper to predict the best strategy for the

auditor and the organization‘s management regarding organization reporting about its strategies. The

model is based on a mathematic payoff matrix in the game theory for analyzing a conflict to choose

between the auditor’s two strategies to be used against the conflicting interests of the organizations‘

reporting strategies, to help make decisions in such situations of conflicts, where the auditors‘ successful

decision is depending on the expense of the organizations‘ strategies reporting.

The model is based on the two strategies for the auditor A1 and A2, and the three strategies of

the organization’s managers and accountable members B1, B2, B3, B4, B5, B6. All regarding the reporting

of organizations about the strategies set by the management in the balanced scorecard about 1) the

financial perspective of growing operating income and increasing shareholder value (stock price), 2)

the customer perspective of increasing customer satisfaction and increasing market share, 3) the internal

business perspective about improving manufacturing quality, capability, and productivity, reducing

delivery time to customer, meeting specified delivery dates, and improving process and post-sales

services, 4) learning and growth perspective about developing process skill, empowering workforce,

and enhancing information system capabilities. In addition to a competitive budgeting strategy.

Table (1) presents the weights I assign to such strategies of the organizations, which I list in

order based on my judgment about their importance, and are used to prepare the mathematic payoff

matrix in the game theory and help identify hypothesis H1 for this paper as (the auditor can change the

strategy of auditing based on predicting the organization’s manager and accountable members' strategy,

and in the meantime, the organization’s manager and accountable members can change their strategy

based on predicting the auditor’s strategy change).

I set the weights to show the importance of the organization's strategies that the auditor

is willing to conduct its auditing process. In this game theory, I use the expected value and add the

5
graphical method to determine the value of the game, which is the amount that each player A (the

auditor) and B (the organization’s manager and accountable members) can expect to win or lose on

average. To calculate the expected value of a game, I determine firstly the payoffs for each player in

each possible outcome using the website aforementioned.

Table (1)

Weights for the importance of organizations‘ strategies derived from the balanced scorecard*

Organizations‘ strategies Weights assigned Indications

Competitive budgeting 1= 30 Good planning and controlling

Improving manufacturing quality,
capability, and productivity  2= 25 High-quality products or services
Reducing delivery time to
customer  3= 24 Good commitments
Meeting specified delivery dates  4= 20 Good commitments
Increasing customer satisfaction  5= 19 Attracting customers
Improving process and 
post-sales services  6= 13 Good warranty
Increasing market share  7= 12 High number of customers
Developing process skill  8= 10 High skills in human resources
Empowering workforce  9= 9 Good spirit of team’s performance
Enhancing information
system capabilities  10= 6 Good operating and control
Increasing shareholder value
(stock price)  11= 5 Good value of the organization
Increasing customer satisfaction  12= 2 Attracting more customers

(*)

 1 = l = 30 ;  2 = e = 25 ;  3= f = 24;  4 = g = 20;
 5 = c = 19;  6 = h = 13 ; 7 = d = 12 ;  8 = i = 10;
 9 = j = 9 ;  10 = k = 6;  11= b =5;  12 = a = 2.

Since: l > e > f > g > c > h > d > i > j > k > b > a (as the srtagies rank),

Then: the inputs to the 2 × 2 two-person game mathematic payoff matrix in the game theory, between the
auditor and the managers and accountable members of the organization regarding the auditing of the
organizations‘ strategies are:

Inputs are entered to the matrix before running the model using the website of :
https://cbom.atozmath.com/CBOM/GameTheory.aspx?q=2xn

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 III. RESULTS

Saddle point test

Table (2) shows the first result of running the 2 × 2 two-person game as the mathematic payoff

matrix in this game theory using the inputs shown in Table (1). Where the maximum of the row minima

is not equal to the minimum of the column maxima ( 6 ≠ 12 ). Therefore, the payoff is not at a saddle

point, and the value of the game is determined, in the steps after, using the expected value I apply using

in the game theory model on the aforementioned website.

 Table (2)

The 2 × 2 two-person game as the mathematic payoff matrix in the game theory between
the auditor and the managers and accountable members of the organization
regarding the auditing of the organizations‘ strategies
[ Payoff is not at a saddle point ]

Player A = the auditor with two strategies (to audit or not to audit) matching B1 B2, B3 B4, B5, and B6
Player B = the managers and accountable members of the organization with three strategies B1 B2, B3 B4, B5, and B6 for
the strategies of providing to the auditor a small size of reported information, or a medium size of reported
information, or a large size of reported information respectively.

Determining the expected value and the value of the game

Table (3) presents the results summary of calculating the expected value and the value of the

game between the auditor and the organizations‘ managers and accountable members, regarding

auditing the organizations‘ strategies, calculated using the website for the mathematic payoff matrix in

the game theory and its 2 × 2 sub-game. Where the goal of the game is to support the research hypothesis

H1 for this paper.

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 Table (3)

Results summary for calculating the expected value and the value of the game between the auditor and
the organizations‘ managers and accountable members,
regarding auditing the organizations‘ strategies

1)

2) 3)

4) 5)

6) 7)

Continued on next page ,,,,,,,,

8
8) 9)

10) 11)

12) 13)

14) 15)

Results are found using the calculator on the following website:

https://cbom.atozmath.com/CBOM/GameTheory.aspx?q=2xn&q1=2%2C5%2C19%2C12%2C25%2C24%3B20%2C13%2C10%2C9%2
C6%2C30%60A1%2CA2%60B1%2CB2%2CB3%2CB4%2CB5%2CB6%602xn%60false&dm=D&dp=2&do=1#tblSolution

9
 From Table (3) the 2×2 sub-game with the lowest expected value as the value of the game is

equal to 10.09 in (7) and hence the solution to this game provides the solution to the main larger game

between the auditor and the organizations‘ managers and accountable members, regarding auditing the

organizations‘strategies. The interpretation of the calculated value of the game is better shown by using

an additional graphical method without the need to solve complex equations and probabilities analysis.

Using an additional graphical method

Using the graphical method in Figure (1), the two parallel lines represent the strategies of

player A. Therefore, If player B (the organization’s manager and accountable members) selects

strategy B1, to provide a large size of information, player A (the auditor) can win 2 or 20 units depending

on the auditor’s selection of strategies. The value 2 is plotted along the vertical axis under

strategy A1 and the value 20 is plotted along the vertical axis under strategy A2. Similarly for all the

other selections of strategies by the organizations’ manager and accountable members and the auditors.

Figure (1)

Results of the graphical method for calculating the expected value and the value of the game between
the auditor and the organizations‘ managers and accountable members,
regarding auditing the organizations‘ strategies

Value of the game = 10.09

Results are found using the calculator on the following website:

https://cbom.atozmath.com/CBOM/GameTheory.aspx?q=graph&q1=2%2c5%2c19%2c12%2c25%2c24%3b20%2c13%2c10%2c9%2c6
%2c30%60A1%2cA2%60B1%2cB2%2cB3%2cB4%2cB5%2cB6%60graph%60false&dm=D&dp=2&do=1#PrevPart

10
 Subsequently, the straight lines joining each two points are drawn for all the strategies of the

organization’s managers and accountable members B1, B2, B3, B4, B5, B6., all regarding the

organization's strategies and competitive strategies. The highest point in the shaded region indicates

the value of the game, which is equal to 10.09.

Interpreting the value of the game for the two players (auditor and organization)

The value of the game 10.09 presents the amount that each player can expect to win or lose on

average. Since the game has no saddle point from the beginning till the reduction of the payoff matrix

has ended, I can call this game a mixed game, where the value of the game as the expected value for

player B (the organization) as a loss is equal to the value of the game as the expected value for player

A (the auditor). Therefore, no strategy for the auditor can be the best strategy, and similarly, no strategy

for the organization’s managers and accountable members can be the best strategy, and the organization

can use any of the three strategies to provide a small size of information, or medium size of information,

or large size of information regarding its strategies and competitive strategies. Similarly, the auditor

can choose any of the two strategies as to conduct the audit and incur its cost, or not.

As a result, hypothesis H1 for this paper is not completely proved by the value of the game

where the auditor can change the strategy of auditing or not based on predicting the organization’s

managers and accountable members' strategy, and in the meantime, the organization’s managers and

accountable members can change their strategy based on predicting the auditor’s strategy change, where

results show that no strategy for the auditor can be the best strategy, and similarly, no strategy for the

organization’s managers and accountable members can be the best strategy.

Therefore, the method of game theory I used is a method for strategic auditing, unlike auditing

the organizations’ strategies. Hence, I recommend differentiating between strategic auditing for

organizations and auditing the organizations’ strategies, where strategic auditing for organizations must

be oriented to an evolutionary perspective, shown by the game theory, regarding the auditors’

trustworthiness towards the organizations’ members from the top management levels to the lower

management levels and regarding building trust in the organizations’ members, where the challenges

11
that auditors usually face when thinking about auditing and ensuring the rightness of the organizations’

strategies are related to the hidden information organizations tend to hide, for trade secrecy purposes

and the desire to have a monopoly position in the national and international markets, which is considered

an economic ethical dilemma, without taking into account the risk of potential strategies failure.

Therefore, auditing organizations’ strategies must draw the attention of the organizations and the

international regulatory bodies to set auditing standards for such strategies and protect all the interested

parties around the organizations internally and externally.

Moreover, I present in the appendix in Table A (1), A(2), A (3), and Figure A(1) the steps to

another method that future research can use to calculate the expected value of auditing or not auditing

the organization’s strategies, for more decision assurance to the auditor, using a decision tree and a

Bayes' theorem approach, which resulted in the expected value for auditing the organization’s strategies

as equal to 10.33, if the organization provides the large size of information regarding the organization's

strategies and competitive strategies, and subsequently ensure that the auditor should conduct the

auditing and incur its cost, and probably can prepare an auditing report about the rightness of the entire

organization's strategies to the organization and the interested parties.

Despite this, both the game theory and decision tree calculate the probabilities required for the

two methods based on my estimation of the weights assigned to each possible strategy and decision.

Therefore, the paper's results are significant only for showing the concept of strategic auditing and its

difference from the required auditing for the organizations’ strategies.

IV. CONCLUSIONS AND DISCUSSION

Most organizations in practice are keeping their strategies and competitive strategies hidden

from the auditors, for the reasons of trade secrecy on one hand, where business secrecy aims to

strengthen the company's competitiveness to safeguard innovation and, in the long run, its resulting

developments. On the other hand, the economic ethical dilemma is another reason why organizations

hide their strategies because they desire to have a monopoly position in the national and international

markets rather than being monopolistic competitive organizations.

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 In this paper, I present the necessity to differentiate between strategic auditing for

organizations and auditing organizations’ strategies by using a mathematic payoff matrix in the game

theory to show the strategic auditing concept and emphasizing the absence of auditing standards

necessary for auditing the rightness of organizations’ strategies. I used the literature of strategic

management accounting to form the game between the auditor and the organization’s manager and

accountable members, where the auditor predicts the organization to provide an appropriate size of

information regarding the strategies in the balanced scorecard of the organization.

In this paper, I use a 2 × 2 games in the game theory approach and an additional graphical

method, compared to a decision tree and a Bayes' theorem approach, without forming complex

equations, and rather depending on website technologies for running operation research methods.

Results show the value of the game is equal to 10.09, and the graph plots the strategies of the auditor

and the organization as the final value of the game that each player can expect to win or lose on average.

The results of this paper show that there is no strategy for the auditor can be the best strategy,

and similarly, no strategy for the organization’s manager and accountable member can be the best

strategy, and the organization can use any of the three strategies to provide information about its

strategies and the auditor as well can use any of his or her two strategies to conduct the auditing or not

to conduct the auditing.

Nevertheless, the results of the decision tree and Bayes' theorem approach show the expected

value equal to 10.33 (which is very close to the value of the game of 10.09) that the organization is to

provide a large size of information regarding its strategies, and subsequently, the auditor decides to

conduct the auditing. The paper's results are significant only for showing the concept of strategic

auditing and its difference from the required auditing for the organizations’ strategies because I estimate

the weights for the strategies and the decisions required to calculate the probabilities of the two methods

used in this paper, and this is the same for all methods of game theory and probabilities, where it is

based on weights and expectations that might be accurate or inaccurate and affected by the certainty

and uncertainty as well.

This paper encourages future research and international auditing regulatory bodies to study the

behaviors expected from organizations regarding auditing the rightness and significance of their

13
strategies and competitive strategies, to set a conceptual framework and set standards for auditing

organizations’ strategies. In addition, the paper encourages future research to use different scenarios to

form the mathematics payoff matrix in the game theory and the decision tree and Bayes' theorem

approach as tools to predict the behaviors of organizations regarding providing their strategies

information to the auditor to help the auditor plan for the auditing process that might be required.

REFERENCES

Abbas, H.F., and Al-Tamimi, A.H.Y. (2020). “The role of strategic auditing in improving the efficiency and effectiveness of
government units” International Journal of Research in Social Sciences and Humanities, 10,3, 282-293.
Abdulameer, S., Obaid, N.K., and Alreeshawee, R. M. (2023). “The role of strategic auditing in achieving sustainable
performance and its impact on improving the competitive advantage of the product (A practical study in
some organizations registered in the Iraq stock exchange” World Bulletin of Management and Law, 22, 75-
87.
Blocher, E., Juras, P. and Smith, S. 9 th ed. 2022. Cost Management: A Strategic Emphasis. New York: McGraw Hill.
Chatterjee, K., Morton, S., Mukherji, A. (2008). Strategic Audit Policies Without Commitment. In: Chinchuluun, A., Pardalos,
P.M., Migdalas, A., Pitsoulis, L. (eds) Pareto Optimality, Game Theory And Equilibria. Springer
Optimization and Its Applications, 17. Springer, New York 407–436
Cheng, P., Childs, B.D., and Sheng, W.W. (2001). “ Strategic auditing: An incomplete information model” Journal of Business
Finance and Accounting”, 25, 5& 6, 631-652.
Fellingham, J.C., and Newman, D.P. (1985). “Strategic considerations in auditing” The Accounting Review, 60, 4, 634-650.
He, M., and Li, H. (2023). “Challenges and realization ways to develop strategic audit of state‐owned enterprises under the
new situation” Frontiers in Business, Economics and Management, 10, 2, 169-173.
Horngren, C.T., Datar, S.M., and Rajan, M.V. 14th ed. 2012. Cost Accounting A Managerial Emphasis. New Jersy:
Prentice Hall.
Karim, H.M., Al-Shatnawi, H.M., Jaf, R.A.S., Al-kake, F., and Hamawandy, N.M. (2020). “ The role of adopting strategic
audit to improve audit quality “ Journal of Critical Reviews, 7,11, 2556-2568.
Kozák, T., and Szántó, S. (2017). “ The audit of business strategy” Economics World, 5, 4, 316-321.
Lillis, B., and Lane, R. (2007). “Auditing the strategic role of operations” International Journal of Management Reviews.
Available at: doi: 10.1111/j.1468-2370.2007.00209.x
Lillis, B., and Szwejczewski, M. (2012). “An exploratory study of strategic operations audit methods in services” International
Journal of Operations & Production Management, 32, 11, 1306-1336.
Shiblea, A.T., Salihb, J.I., and Abdul Rahmac, N.G. (2020). “The role of the strategic audit in improving industrial companies'
performance: A field study of companies operating in Basra province, Iraq” International Journal of
Innovation, Creativity and Change, 13, 5, 1274-1296.
Wahl, M. F. (2015). “Strategic audit and ownership strategy” International Journal of Business and Social Research, 5, 9,
93-100.
Wild, J.J., and Biggs, S.F. (1990). “ Strategic considerations for unaudited account values in analytical review” The Accounting
Review, 65, 1, 227-241.

14
 APPANDIX

Table A (1)
The assigning of weights to the alternatives D1 small size of information, D2 Medium size of information
, and D3 large size of information for the states S1 to audit and S2 to not audit

The expected information

To be provided regarding the
organization’s strategies Weights for auditing Weights for not auditing
(Di ) ( S1 to audit ) ( S2 to not audit )
D1 small size of information W11 =3 W12 = 1
D2 Medium size of information W21 = 6 W22 = 4
D3 large size of information W31 = 11 W32 = 7

Table (2)
The probability distribution for the alternatives D1 small size of information, D2 Medium size of information
and D3 large size of information for the states S1 to audit and S2 to not audit

The expected Expected auditor's Expected auditor's

information decision to decision to not
to be provided conduct the conduct the auditing
regarding the auditing for the The probability for the The probability
organization’s organization’s distribution organization’s distribution
strategies strategies P (S1 to conduct the audit ) strategies P (S2 to not conduct the audit )

(Di ) ( S1 to conduct the audit ) ( S2 to not conduct the audit )

D1 small size of
information
W11 = 3 0.15 W12 =1 0.09
D2 Medium size of
information
W21 = 6 0.30 W22 = 4 0.33
D3 large size of
information
W31 = 11 0.55 W32 = 7 0.58
20 1.00 12 1.00

15
 Table (3) A
Tabulated statistics:
Expected size of information leading to the expected auditor’s decision
P( Di │ Si ) and P( Si │ Di )
& joint and marginal probabilities for the overall data.

Using MINITAB

Tabulated statistics: Expected size of information (Di), expected auditor's decision (Si)

Rows: Exp size of information

Columns: Exp auditor’s decision to audit or not
Not to
audit To audit All

Large size 1 1 2
50 50 100
33.33 33.33 33.33
16.67 16.67 33.33

Medium size 1 0 1
100 0 100
33.33 0.00 16.67
16.67 0.00 16.67

Medium size 0 1 1
0 100 100
0.00 33.33 16.67
0.00 16.67 16.67

Small size 1 1 2
50 50 100
33.33 33.33 33.33
16.67 16.67 33.33

All 3 3 6
50 50 100
100.00 100.00 100.00
50.00 50.00 100.00

________________________________________________

Cell Contents:

Count

% of Row:

Computes the conditional probability for the expected auditor’s decision to audit (Si),
conditioned on (Di) percentage of the expected size of information [ P( Si │ Di )]

% of Column:

Computes the conditional probability for the expected auditor’s decision to audit (Si),
conditioned on (Di) percentage of the expected size of information [ P(Di │ Si )]

% of Total

Joint and Marginal

16
 Figure A (1)

The expected value of the decision tree for the three decision alternatives
D1 small size of information, D2 Medium size of information , and D3 large size of information
for the states S1 to audit and S2 to not audit with the weights Wij
based on bayes' theorem and conditional probability (*)

Expected value
computed.

(*)
Using a backward pass computation

To compute the expected value.

Where:
0.167 = P( S1 │ Di ) The conditional probability for the expected auditor’s decision to audit ( S1) Conditioned on ( Di )
0.833 = P( S2 │Di )The conditional probability for the expected auditor’s decision not to audit ( S2 ) Conditioned on ( Di )
Wij = The weights for the states S1 to audit and S2 not to audit

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