Forensic Services Supplied by Audit Firms AND Audit Quality

Otto-von-Guericke-University of Magdeburg, Germany
Johanna Zwernemann
Otto-von-Guericke-University of Magdeburg, Germany
Service portfolios of audit firms are increasingly extended by
forensic services, i.e. additional consultancy, which
comprise services to the detection/investigation and prevention of fraud.
Our analysis draws attention to the benefit of forensic services.
Beside additional clients benefit audit firms can profit
of the supplementary service offer. First, we show that detection risk
of audit firms who also offer forensic services
can be decreased because they have incentives to devote a higher
effort in annual audits to detect fraud and, in turn,
to gain an additional service contract. Second, our analysis
demonstrates that the manager’s manipulation probability
decreases if the annual auditor offers forensic services. Both effects
together decrease audit risk and therefore audit
quality can be improved if the auditor supplies also forensic
services. However, in equilibrium, the audit effort of both
auditor types is equal.

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CA Ramachandran Mahadevan,M.Com.,F.C.A.,