Knowledge that Transforms

Opportunity Costs, Investment choice

Shakespeare

APB opinions, Disclosure quality, Funds-reporting, APB opinion No. 19

Auditing, Auditor opinion, Informativeness, Negative confirmation

APB opinions, FASB, Independence, Role of regulator

APB opinions, CPA, Accounting Principles, Attitude change

The work of independent auditors involves two basic activities evidence collection and evidence evaluation. Substantial agreement exists concerning the types of evidence that should be collected in particular situations and the appropriate collection techniques. The evidence-evaluation activity, however, is less susceptible to codification. As a result, the auditing profession relies heavily upon professional in evaluating audit evidence. For example, the AICPA has stated that of the independent auditor's work in formulating his opinion on financial statements consists of obtaining and examining evidential matter. The measure of the validity of such evidence for audit purposes lies in the judgment of the auditor. 1 The importance of judgment in auditing is accepted almost without question; yet auditors' judgments are seldom subjected to systematic research. A typical rationale for this situation is the AICPA's statement that 'judgment is the most important factor in the making of any audit, but in many situations it is practically impossible to write out in specific language how the auditor applies judgment. 2 The study reported in this paper was concerned with the evidence-evaluation function of independent auditing. One type of audit evidence was * Assistant Professor, University of Texas at Austin. This paper is based upon the author's doctoral dissertation; for the full report, see R. H. Ashton, Judgment Formation in the Evaluation of Internal Control: An Application of Brunswik's Lens Model (Minneapolis: University of Minnesota, 1973).

Several accountants have previously pointed out some of the inherent conflicts that exist among the seven qualitative objectives of financial accounting identified by the Accounting Principles Board in Statement No. 4.' It is not the intention of this study to pursue this topic in its entirety. Rather, only relevance-considered by the APB to be the primary objective of financial accounting-and are discussed here. And this study seeks to establish the complementary nature of these two concepts, rather than to point out conflicts between them. The interdependency of the relevance and understandability objectives can best be illustrated by examining the meanings of these terms as used by the Board: Relevance. Relevant financial accounting bears on the economic decisions for which it is used. (para. 88) Understandability. Understandable financial accounting presents data that can be understood by the users of the and is expressed in a form and with terminology adapted to the users' range of understanding. (para. 89) It should be noted that Statement No. 4 does not distinguish between the terms information and data. In and communication theory, exists only if the datum: (1) is relevant (i.e., reduces the amount of uncertainty associated with a decision), and (2) is understood (i.e., it is correctly deciphered by the observer [user] of the datum). If we substitute datum for in the definition of relevance,

Human resources, Human capital, Investments

C-V-P Analysis, Cost-Value-Profit analysis, Upper boundaries