These results are quite intuitive and are readily derived from straightforward differentiation of (4.8). The conclusions indicate that the demand for auditing is strongest when the regulator’s initial uncertainty is large and when the result of the audit is very informative about the firm’s private information. The same is true when the firm can be penalized heavily following an unfavorable audit, because the auditing instrument is a particularly powerful deterrent against cost exaggeration in this case. Of course, the demand for auditing will also be greater when an investigation of the firm’s costs is less expensive and when the regulator is more concerned about consumers’ surplus than profit.