Internal control system, Decision making, Parallel-processing control decisions

Internal auditors, Objectivity

In a recent article, Menzefricke [1983] adapted the fixed constrained optimization approach (Boockholdt and Finley [1980]) to dollar-unit sampling. In Menzefricke's model, the auditor's objective is to determine the n, k pair (sample size and acceptance number) that minimizes total expected costs subject to a type II risk constraint. He provided an algorithm for determining the optimal n, k pair with two possible stopping rules, one which he proved would be optimal and one which he conjectured would also lead to an optimal solution. In this note I provide some counterexamples that demonstrate that his conjecture about the second stopping rule was incorrect.

Charles R. Ransom, The Ex Ante Information Content of Accounting Information Systems, Journal of Accounting Research, Vol. 23, Studies on Accounting Earnings and Security Valuation: Current Research Issues (1985), pp. 124-139

Shanken (1985) derives a test for the zero-beta capital asset pricing model (CAPM) which, as he points out, is equivalent to a test of the mean/variance efficiency of the market portfolio. This note illustrates the geometry of Shanken's test in the mean/variance space.

Common stock portfolios of large, heavily traded firms exhibit daily first-order serial correlation in excess of what would be expected, given the individual security coefficients. Further, this correlation rises as the number of securities in the portfolio increases. The direct implication of this finding is that nonsynchronous trading is not the only cause of correlation in daily market indices. Related implications are also discussed.

This paper treats a problem of stochastic cash management under an average compensating-balance requirement. It develops a dynamic programming formulation of the problem in which the relevant state is a unidimensional quantity equivalent to the forecasted average balance at the end of the averaging period. Under usably broad conditions, it establishes the optimality of a transient policy of simple type, similar to the two-sided inventory type policy familiar from certain earlier studies of stationary cash balance problems having absolute balance requirements. The results apply to cases in which the transactions costs contain both fixed and proportional components. The paper discusses also a numerical example drawn from the literature of the cash balance problem and shows by simulation of the optimal (and simply modified forms of the optimal) policy, that good protection is afforded against negative balances, even though the model does not explicitly constrain the negative-balance probabilities.

Cowell has shown that if an inequality measure satisfies (1) additivity, (2) decomposability (among population groups), (3) additivitiy of the group inequality measures, (4) symmetry within groups, and (5) twice differentiability, it can be written as an additive function of group measures belonging to the CES class or of the form ∑i, si, ln si, where si is the i-th person's share. Using a result from the theory of functional equations, I prove that the first two conditions, often imposed for analytical convenience, alone imply Cowell's structure. Symmetry, or other ethical postulates, can then be represented by simple parametric restrictions.

This paper presents a macroeconomic model containing optimizing, inventory-holding firms that is consistent with a number of prominent empirical regularities concerning fluctuations in output, exchange rates, relative prices, and money. Prices are sticky, but they are not predetermined. Still, our model is consistent with exchange rate overshooting in the sense of Dornbusch. Typical sticky-price models allow a divergence between current production and current demand, but this divergence is never allowed to feed back into the model. Our optimal inventory adjustments reconcile divergences between current demand and production, and the inventory stock movements provide expected future dynamics.

The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.