Abstract

One of the fundamental issues in the studies of auditing behavioral research is the determinant of audit decision (judgment) performance regarding knowledge factor, where audit judgment performance and knowledge are affected by ability, motivation, and environment. The motivation and the resulting cognitive effort factors are, however, exogenous in the literature. In addition, the environmental factor is usually not considered. This study relaxes these two assumptions, in which the common environmental uncertainty of the audit market is supposed to be the audit litigation risk. We explore the relationships among effort, incentive scheme, and decision performance and test the underlying assumption of the agency theory. The incentive scheme includes both the profit sharing contract and the relative performance evaluation contract. The experimental results indicate that, under either type of incentive scheme, effort is significantly positive related to audit decision performance. Moreover, decision performance differs depending on the types of the incentive contract, in that it is significantly greater under the profit sharing contract than under the relative performance evaluation contract. These findings are consistent with the economic hypothesis, but are contrary to the behavioral hypothesis. Some of the evidence shows that knowledge is significantly related to judgment performance. However, the audit judgment performance is not significantly affected by audit litigation risk under either type of incentive contract. The implication for research and practice are also discussed.