Measuring Audit Risk by Data Envelopment Analysis

Nurhan Davutyan () and Lerzan Kavut

Istanbul Stock Exchange Review, 2007, vol. 9, issue 33, 59-78

Abstract: Obtaining a scalar performance score in multicriteria decision making situations is an oft encountered problem. A case in point is deriving an audit risk score for prospective clients by independent auditors. The purpose of the present paper is to show how this can be done by using Data Envelopment Analysis (DEA). Such quantification of client risks will help independent auditors in the client selection process. It will also contribute to sound decision making by auditors thereby enhancing their credibility. Taken together all these benefits will help improve the working of Capital Markets. Our study uses a data base consisting of values for 9 risk factors for 24 prospective clients of an independent auditor. It explicitly shows how to use DEA for price setting.

Keywords: Data Envelopment Analysis; Client Relationships; Audit Engagements; Risk Assessment; Client -Acceptance risk; Engagement Risk; External Audit; Independence Audit. (search for similar items in EconPapers)
Date: 2007
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