Auditing, Sampling, Dollar-unit sampling, Bayesian model

The article presents a short-run planning model for a decentralized firm, which includes a linear programming model for the allocation of scarce corporate resources. The decentralization philosophy is well known and its essence lies in the desire by large firms to delegate responsibility decision making on a broad basis throughout the organization. A classical decentralization problem occurs in the planning phase of a decentralized organization. It consists of the question of how to obtain an optimal plan for the firm as a whole while allowing each division to do its own planning. An important limitation to the decomposition technique is that only problems of a certain form can be subjected to the technique. The decentralization model presented has the general form required for the application of the decomposition technique. The "market" values are, in mathematical programming terminology, the dual values on scarce corporate resources. This description essentially applies to all applications of the decomposition methodology to the decentralized decision making problem.

Sampling, Upper precision limit, Internal control, Finite Bayesian procedure

[This article considers audit sampling and the auditor's risks of incorrect conclusions in deciding whether an accounting population contains a material error amount. The proposed new sample evaluation procedure takes into account the correction of all errors observed in the sample and calculates a modified upper bound on the total error amount remaining in the unsampled population. This procedure is known as rectification. It is shown that rectification significantly reduces the risk of incorrect rejection when sample sizes of 150 and 300 are used. Since the size of the error amount observed in the sample is crucial to the extent of risk reduction, the first stage of this study investigated the magnitude of rectification for three dollar-unit sample selection methods commonly used in practice-systematic, random, and cell selection. Theoretical results for the expected error amount contained in systematic samples were obtained for 32 different study populations for three sample sizes (65, 150, and 300). Simulation was used to estimate the expected error amounts with random and cell selection for the same 32 study populations and three sample sizes. The results show that the average error amount subject to rectification with cell selection is very close to that with systematic selection for all three sample sizes. Random selection produced smaller expected error amounts than did systematic selection, especially for the larger sample sizes. In the second part of the study, the risks of incorrect rejection with and without rectification were compared. Factors considered in this comparison were sample size (65, 150, or 300) and sampling method (systematic, random, or cell). Use of rectification led to noticeable reductions in the risk of incorrect rejection for sample sizes other than 65. For a given application, auditors will need to determine whether the cost of the additional sampling is balanced by the savings from the reductions in the risk of incorrect rejection with rectification.]

This article considers audit sampling and the auditor's risks of incorrect conclusions in deciding whether an accounting population contains a material error amount. The proposed new sample evaluation procedure takes into account the correction of all errors observed in the sample and calculates a modified upper bound on the total error amount remaining in the unsampled population. This procedure is known as rectification. It is shown that rectification significantly reduces the risk of incorrect rejection when sample sizes of 150 and 300 are used. Since the size of the error amount observed in the sample is crucial to the extent of risk reduction, the first stage of this study investigated the magnitude of rectification for three dollar-unit sample selection methods commonly used in practice-systematic, random, and cell selection. Theoretical results for the expected error amount contained in systematic samples were obtained for 32 different study populations for three sample sizes (65, 150, and 300). Simulation was used to estimate the expected error amounts with random and cell selection for the same 32 study populations and three sample sizes. The results show that the average error amount subject to rectification with cell selection is very close to that with systematic selection for alt three sample sizes. Random selection produced smaller expected error amounts than did systematic selection, especially for the larger sample sizes. In the second part of the study, the risks of incorrect rejection with and without rectification were compared. Factors considered in this comparison were sample size (65, 150, or 300) and sampling method (systematic, random, or cell). Use of rectification led to noticeable reductions in the risk of incorrect rejection for sample sizes other than 65. For a given application, auditors will need to determine whether the cost of the additional sampling is balanced by the savings from the reductions in the risk of incorrect rejection with rectification.

A professional paper recently examined some of the economic considerations of a statement prepared by the American Accounting Association's Committee on Basic Accounting Theory. It represented the accounting function by an information economic model embodying a utility function of a user. The article examines this Committee's statement from a more fundamental perspective with a focus on the particular statement that accounting is an information system. Specifically, the analysis consists of four parts. First, an overview of information theory is presented. Second, a concept of formal information systems is developed. This will include a differentiation between information theory and information systems and the identification of the critical elements in formal information systems. Third, two generalized models of accounting theory are presented which culminate with a model embodying the critical elements in formal information systems. Finally, the insights gained from the latter model are used to indicate research areas in accounting theory.