Knowledge that Transforms

This article presents information on the relationship between internal control evaluation and audit sample size. The purpose of this paper was to analyze the relationship of internal control and sample size and to discuss the two suggested linking techniques. There is a logical relationship between internal control and sample size and that, although either proposed technique accomplishes the linking, the Bayesian approach is preferable. A seemingly plausible and often stated justification for relating control and saw pie size is the direct effect that internal control exercises over the state of the population from which the sample is drawn. It is apparent that internal control procedures will determine the possibility of errors within a population. Good control exhibits a causal relationship diminishing probability of errors as control effectiveness decreases, the probability of errors increases. Thus, this obvious relationship seems to justify the inverse relationship of control and necessary sample size. However, although it is not readily apparent, the state of internal control and sample size are automatically linked in classical sampling theory. The confidence level and precision with which an auditor desires to make an estimate from a sample are a function of the size of the sample and the statistical variance of the population from which the sample is drawn.

Reviews the book "Accounting: A Direct Approach," 2nd ed., by J. Harrison, J. Horrocks and R.L. Newman.

The article reports that when the production costs of a product follow the learning curve phenomenon the ratio of actual production costs to units produced declines over the product's life cycle. The production process has two joint products, one physical and the other intangible. The physical product is the unit being produced for sale. The intangible product is the ability to produce additional units with a lower expenditure of time and materials. This intangible asset is a firm-specific, job-specific asset. It is of value because it can reduce subsequent production costs. The value of the intangible asset increases rapidly at first as the organization quickly acquires "know how." As production becomes more efficient the rate of investment in this intangible asset declines until little or no additional investment takes place. Finally, as the product's life cycle nears its end the intangible asset loses value as the potential cost savings from its use declines. Current accounting procedures do not give recognition to this intangible asset.

This article discusses the use of accounting in daily life. In its simplest form, the need for clearing an account is most commonly encountered where the accounting entity has two or more bank accounts, and there is a remittance from one to the other. A much more interesting and far-reaching application of the clearing account occurs where there are transfers of assets or services between two units of the same business. By its very nature the asset most amenable to overage or shortage is cash. But other vulnerable assets are accounts receivable, inventories, and even certain equipment such as small tools. Presumably today's accounting student, about to enter the world of business or government, is long since the master of these sometimes mischievous accounts. If not, he should be. Although these accounts occupy but a small nook in the spacious firmament of accounting, they are often of great practical value, if not indispensable. And, despite their minor rank, they illustrate that, like the chemical elements, they nevertheless have their own peculiar functions, structures, limits, and idiosyncrasies. They are not just "data."

Reviews the book "Tax Incentives and Capital Spending," edited by Gary Fromm.

The purpose of this article is to re-emphasize the effectiveness of simple ranking techniques in the heuristic solution of capital budgeting problems. Certainly, the application of mathematical programming techniques to capital budgeting decisions provides a most challenging area for research. Such programming formulations have continued to increase their realism by accounting for capital constraints, institutional requirements, and the effect of uncertainty. To examine the relative efficiency of selecting capital projects by a ranking strategy, it was necessary to have several hypothetical capital budgeting problems. The efficiency of simple ranking techniques requires that projects have a reasonably proportionate utilization of resource constraints. However, even in the absence of this condition, it is possible to generate an "approximate" solution by extending the previous simple ranking techniques to a "multidimensional" ranking criterion. Basically, the multidimensional ranking algorithm is an extension of the simple ranking techniques, and this extension is required for capital budgeting problems with multiple resource constraints which have considerable variation in their utilization by the proposed investment projects.

The article is a comment on an article "Discounted Cash Flows, Price Level Adjustments and Expectations," by researcher, Harold Bierman Jr., published in the October 1971 issue of the journal "The Accounting Review." Bierman suggests that the book value of his $1,529 asset would be shown as $1,036 on a price-level adjusted position statement which is "too high a value since the present value of the asset is $901." This "finding" leads to his major conclusion. According to the author, such a statement is not consistent with the manner in which price-level adjustments are and should be made. In fact, price-level adjustments are simply translations from one unit of currency to another. The projection of cash flows is correct but it must be noted that this schedule is expressed in monetary amounts reflecting the change in price level between periods. A schedule can, and should, be re-cast into three separate schedules, each using a uniform value of currency. A correct statement of economic depreciation for the first period, has been provided.

Reviews the book "Topics in Accounting and Planning," edited by Richard Mattessich.

Reviews the book "Accounting and Developing Nations," by George M. Scott.

The article discusses the use of medieval statements for teaching accounting. This writer has found that even at the introductory accounting level, it can be very worthwhile and intellectually stimulating to devote some time to a consideration of the historical roots of accounting. Students seem to benefit from observing that accounting is not only a vital tool of control and communication in modern industrial society, but that it plays a role in any society. One idea that beginning students seem to find particularly intriguing is the realization that the development of accounting technology is intimately inter-related with the evolution of other socio-economic institutions. One idea that beginning students seem to find particularly intriguing is the realization that the development of accounting technology is intimately inter-related with the evolution of other socio-economic institutions. Further, they appear glad to be made aware that the contents of financial statements are interwoven with clues as to the institutions of the society which produces those statements. Accounting has been an organizing and communicating tool in old societies as well as new, and in communistic societies as well as capitalistic.