Knowledge that Transforms

Budgeting, Uncertainty, Non profits, Fixed budgets

Several researchers (e.g., Boatsman and Robertson [1974], Dyer [1975], Frishkoff [1970], Pattillo [1975], Pattillo and Siebel [1974], and Woolsey [1973]) have attempted to explain how auditors make materiality judgments. However, these research efforts have not provided satisfactory explanations of the materiality judgment. In this paper, we (1) suggest a different view of the materiality concept, (2) suggest a methodology for examining how materiality decisions are reached, and (3) demonstrate the application of this approach to a specific materiality decision. Much of the research on materiality judgments is focused on discovering the amount of consistency which exists among professionals in making materiality judgments. The findings of this research have demonstrated that, in fact, no consensus exists in the profession. Bernstein [1967] summarizes much of the literature with the observation: [the decision function] seems to be . . . a highly personal device, since the output [decisions] can vary significantly on what are the same or similar sets of facts. Four possible sources of differences may exist among auditors' decision models which would explain the lack of consensus in materiality judgments. These are: (1) the variables deemed relevant to the decision; (2) the ma-

Internal rate of return, Accounting Rate of Return, Asymptotic limit, Capital budgeting

Segment reporting, Disaggregation, Informational content

Disclosures, Accounting changes, Informational content

Performance evaluation, Uncertainty, Risk-sharing, Controllability

In this paper we provide a statement of the relationship between the weak axiom of revealed preference (WA) and the negative semidefiniteness of the matrix of substitution terms (NSD). As a corollary we determine the relation between WA and the strong axiom of revealed preference (SA). The latter is equivalent to NSD and the symmetry of the matrix of substitution terms. The former, WA, implies NSD but is not implied by NSD. Also, WA is implied by the condition that the matrix of substitution terms is negative definite (ND), but it does not imply ND. Application of these results yield an infinity of demand functions which satisfy WA but not SA.

WE CONSIDER A MICROECONOMIC growth model in which a certain product or service, supplied and consumed period by period, becomes more valuable to a consumer-objectively or subjectively-as its use becomes widespread, up to some level of saturation. A reasonable example might be the rental of communication facilities. Taking the standpoint of the producer, we ask for that schedule which maximizes the present value of the profit stream. We show that the solution to this problem differs considerably from that given by profit maximization in each individual period (sometimes termed myopic): it calls for lower prices to the consumer. As such, it provides some quantitative justification for practical policies of pricing for development. Its intuitive explanation is that lower prices (i.e., larger outputs) in the initial stages speed the buildup of demand to its saturation value; the larger profits realizable on larger volume are thereby brought foward in time and increase their contribution to the discounted stream. This effect, being independent of the shape of demand or cost curves, may be attributed to growth alone. It suggests that growth potential, when properly perceived and utilized, can yield a mutual gain to the producer and consumers, since the latter benefit not only from lower prices, but also from the fact that the value of the product to them, which is assumed to increase with higher use, likewise rises more rapidly.