Knowledge that Transforms

Informational Content, Interim expenses, Interim Sales, Interim Earnings

In a recent paper in this Journal, Gaumnitz et al. [1982] provided evidence on the consensus of auditors' judgments which seemed to reconcile conflicting results reported in Ashton [1974] and Joyce [1976]. In their study Gaumnitz et al. [1982] combined judgment tasks of evaluating internal control and recommending the number of audit hours needed to assess the propriety and collectibility of accounts receivable. They reported mean correlations of 0.704 and 0.617 for internal control and audit planning judgments, respectively. The former was consistent with Ashton [1974] and the latter was higher than observed by Joyce [1976], who reported a mean correlation of only .373 for audit hour of an accounts receivable subsystem. Gaumnitz et al. suggested that by linking the two judgment tasks they reinforced the link between internal control and planned number of audit hours. Specifically, they stated: link is provided by the auditor's knowledge that an inverse relationship should exist between the strength of internal control and the number of audit hours planned. Thus, the requirement to provide an explicit judgment on the strength of internal control enabled our subjects to operationalize this inverse relationship, resulting in a high correlation (relative to Joyce's findings) among audit hour estimates [1982, pp. 753]. This explanation appears plausible given the results of previous audit judgment research. That is, high levels of consensus have been found for

Chris Olsen, J. Richard Dietrich, Vertical Information Transfers: The Association between Retailers' Sales Announcements and Suppliers' Security Returns, Journal of Accounting Research, Vol. 23, Studies on Accounting Earnings and Security Valuation: Current Research Issues (1985), pp. 144-166

Monitoring, Moral Hazard, Contracting, Stochastic monitoring policies

Cost variance, Auditing, Agency Theory

G. William Glezen, James A. Millar, An Empirical Investigation of Stockholder Reaction to Disclosures Required by ASR No. 250, Journal of Accounting Research, Vol. 23, No. 2 (Autumn, 1985), pp. 859-870

In this paper, I provide two theories about why management might withhold information which is not proprietary, together with an analysis of the consequences of altering various assumptions underlying these theories. Proprietary information is considered here as any information whose disclosure potentially alters a firm's future earnings gross of senior management's compensation.' Even if a manager's private information is proprietary, shareholders may benefit occasionally from having this information disclosed (see Verrecchia [1983] and Dye [1984a]), although obvious explanations exist for the rarity of such disclosures. However, it is commonly believed that managers possess information about the firms they run, such as annual earnings' forecasts, whose release would affect the prices of their firms, but not the distribution of their firms' future

Internal control systems, Auditing, Accounting errors, Reliability model

Internal control systems, Budgeting, Functional activities

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.