Behaviour of the posterior error rate with partial prior information in auditing

Abstract

Most of the Bayesian literature on statistical techniques in auditing has focused on assessing appropriate prior density using parameters such as interest, error rate and the mean of the error amount. Frequently, prior beliefs and mathematical tractable reasons are jointly used to assess prior distributions. As a robust Bayesian approach, we propose to replace the prior distribution with a set of prior distributions compatible with auditor's beliefs. We show how an auditor may draw the behaviour of the posterior error rate, using only partial prior information (quartiles of the prior distribution for the error rate ϕ and, very often, the prior distribution is assumed to be unimodal). An example is pursued in depth. © 1995 Journals Oxford Ltd