Making Auditing Decisions: The Bayesian Decision‐tree Approach

Illustrates the use of the Bayesian decision‐tree approach in making auditing decisions. First reviews the audit process and shows that the outcomes of auditing decisions depend not only on the courses of action but also on some uncontrollable chance events. Explains the Bayesian decision‐tree approach and the concepts of prior and posterior probabilities and expected values. Also illustrates the framework within which the approach is applicable. Shows how the Bayesian decision‐tree approach can be applied in auditing situations (e.g. substantive testing and the review of other auditor′s work). Finally, suggests some probability results that can be used in other auditing contexts. Offers additional insights into the use of Bayesian methods in auditing and presents auditors with a tool which they can use in making auditing decisions.