This paper uses an incomplete information game-theoretical model to study the interaction between managers and auditors. Previous analytical research about this topic usually focuses mainly on whether raising auditors' legal liability can give auditors incentives to provide more effort and increase the quality of accounting information. We further consider the penalties on managers' misreporting and investigate their effect on the equilibria. Our results show that the equilibrium containing auditors' high effort might not be attained by simply raising the punishments on them. Instead, we have to set the penalties on both parties properly to induce auditors' effort effectively. Besides, this paper uses more equilibrium refinements to find out the equilibria which are both reasonable and stable. This has never been used in the previous research.