Subjective Prior Probability Distributions and Audit Risk

Abstract

This paper presents an analysis of the audit risk consequences of PPD ex- tremeness deficiencies and miscalibration.While there is empirical evidence that auditors, like many other decision makers, assess miscalibrated PPDs , the attendant inferential risk consequences of such deficiencies have not been addressed in the extant literature.The comparative statics analysis performed in this study indicates that the risk effects of miscalibration and extremeness deficiencies on the auditor's (substantive testing) evaluation decision are complex and cannot be predicted from an examination of the planning (sampling size) decision.