Knowledge that Transforms

Abstract This article discusses the nature of the assessment activity for audit decision making with citing an overview of some relevant research and some supporting evidence on the topic. The purpose of this article is to give additional exposure to a method of assessing prior probability distributions that appears to be particularly congruent with the auditor's environment. The process of quantifying qualitative evidence appears in the literature under a variety of terms, including "eliciting Bayesian priors" and "probability encoding." In this article, the process is referred to as "assessing prior probabilities or subjective probability distributions (SPDs)." According to the author, a satisfactory assessment of the prior probability function would result when the auditor, after training, believes that the resulting distribution is a good summary of his or her qualitative evidence. In a recently conducted study, all of the auditors had some difficulty in deciding where the first and third quartiles of the SPD ought to be in using the direct assessment method. There is some evidence that training in assessing SPDs may be an effective means of overcoming a common problem, that is, a possible tendency to underestimate dispersion. Results of that study indicate that even limited training may have an effect and that at least some auditors are receptive to the study and use of subjective probability distributions and Bayes method.

Abstract The article focuses on a discussion on ramifications of tax deductibility of a visiting professor's travel expenses as discussed by researcher Allen Ford. The article deals extensively with the tax implications during the professor's stay; however, an addendum is needed for the professor who decides to remain permanently in the position, especially in light of the number of professors so inclined. The two tax questions facing the professor in a decision to stay or even to move to a new position are the taxability of any gain on the sale of the residence at the former location and the availability of a moving expense deduction. Under section 1034, gain from the sale of a taxpayer's principal residence is not recognized, provided certain conditions are met. Regulation 1.1034-1(c)(3) (i) states that the mere fact that property is, or has been, rented out is not determinative that such property is not used by the taxpayer as his principal residence. In the case where a taxpayer uses more than one property as a residence, the determination of whether property is used by the taxpayer as his principal residence depends upon all facts and circumstances in each case.

Abstract Reviews the book "Full Cost vs. Successful Efforts in Petroleum Accounting: An Empirical Approach," by John H. Meyers.

Abstract The paper presents tests of whether extraordinary revenues and expenses are used to smooth ordinary or operating income over time. While the subject of income smoothing was discussed and tested previously, the role of extraordinary items never was tested for specifically and separately. This observation is most striking, particularly in view of the fact that by applying different smoothing mechanisms, extraordinary items can be used to smooth various series, such as net, ordinary or operating income. Although past studies assumed that smoothing is practiced in order to affect the income stream presumably utilized by financial statements users, the focus was exclusively on the net income numbers, when, in fact, ordinary income per share is the focal number of users of financial statements and therefore, should be the object of smoothing. Indeed, income smoothing could be designed to convey information relevant for the prediction of future earnings. In the present case, smoothing is used as a vehicle for management to convey its expectations within the framework of conventional accounting practices, which do not permit direct forecasts.

Abstract Reviews the book "Auditing Public Education: Current Status and Future Potential," by Peter L. McMickle and Gene Elrod.

Abstract This paper reported on an experiment designed to answer two questions. Firstly, does human resource accounting information affect stock investment decisions? Secondly, why might human resource accounting information affect stock investment decisions? Related to the first question, in this experiment stock investment decisions were affected by the addition of human resource accounting information to conventional accounting information. Concerning second question, the results of this experiment indicate that the degree of openness of the belief system is not important in explaining decision differences when human resource accounting information is added to conventional accounting information. In conclusion, this research is based on an experiment. The administration of such an experiment occurs under somewhat artificial conditions. Because this study was an experiment using graduate students as subjects, the conclusions of this study cannot be generalized to other decision situations or statement user groups. However, the favorable results of this experiment should justify the additional research that would permit more general conclusions.

Abstract In a recent article, Edward B. Deakin and Michael H. Granof " demonstrated how regression analysis, coupled with Bayesian statistical procedures, can be used to provide the auditor with assistance in selecting those accounts for investigation that are most likely to result in significant audit findings. The article encourages audit model development and experimentation by independent auditors with the application of these and other techniques which make use of additional information. The independent auditor's ultimate concern with respect to a reported account balance of a client, is whether it is "fairly presented." Suppose that the auditor has evaluated the design of an internal control subsystem and has conducted tests of compliance of system operation with system design. Substantive tests include analytical review of significant ratios and trends and resulting investigation of unusual fluctuations and questionable items and tests of details of transactions and balances. Without the refinement, the sample sizes required after using regression analysis to revise priors often will be substantially smaller than the 163 required under classical, unrestricted random sampling.

Abstract This article focuses on the usefulness of a flow chart conceptualization method for better interpretation of auditors' reports on financial statements. Here, the authors have developed a flow chart that covers most reporting situations confronted by certified public accountants. The purpose of the flow chart is to provide students of auditing with an easy to understand logical model of the major reporting possibilities. A definitive understanding of related sections of the "Codification of Statements on Auditing Standards, Numbers 1 to 7," however, requires careful reading and study; the flow chart presented here is not intended to relieve students of that task. It is suggested that, if sufficient evidence is obtained through alternative auditing procedures, there is no significant scope limitation, and the report need not be modified from the wording of an unqualified opinion. If part of the examination is made by other auditors, the principal auditor may issue an unqualified, an "except for" qualified, or a disclaimer of opinion. After making any necessary inquiries, if he or she is satisfied with the professional reputation and independence of the other auditor, the principal auditor normally should render an unqualified opinion.

Abstract From these results it can be inferred that self-paced instruction using audio-visual instruments is as meaningful a learning tool as the traditional lecture-discussion format. There were no significant differences between performances in the audio-visual sections and the students' performances in the traditional section. The progress of the students from the audio-visual sections in subsequent accounting courses currently is being monitored. Preliminary results, not reported here, indicate that students from these sections have performed as well in upper-level accounting courses as have students from the traditional sections. A second inference from our reported data is that the students' past performances, as measured by their GPA's, were correlated more highly to the students' performances in the audio-visual sections than they were in the traditional section. Informal discussions with individual students revealed that the better students, as measured by their GPA's, liked the freedom of getting the work done ahead of schedule, thus enabling them to concentrate on other courses. All students completing the course early were in the upper half of the overall GPA's and received grades of A or B in the course. The informal discussions also indicated that the lower GPA of the poorer students frequently was caused by a lack of motivation. Thus, the self-paced format with its stress on individual motivation may be more harmful to the poorer students than would be the traditional format.

Abstract This article presents a commentary in response to a critical note by Bart P. Hartman and H.C. Zaunbrecher, published in this issue, about the author's article on the comparability and objectivity of exit value accounting. The author appreciates the effort by Hartman and Zaunbrecher to observe several imperfections in the experimental design of the study illustrated in the said article. Hartman and Zaunbrecher suggest several alternative procedures which might have further validated the study's findings. The author clarifies that the entire discussion of the critical note was concerned with limitations in experimental design concerns only three issues, two of which were stated explicitly in the original article. The first criticism concerns the fact that all exit values were based upon a single asset, while book values relate to twenty-six different assets. The second criticism is that all the dealers were located in a limited geographical area, while book values were obtained from owners dispersed through out the United States. The third criticism concerns the manner in which surrogate exit value measures were derived.