Knowledge that Transforms

[The purpose of this paper is to assess via simulation the effectiveness of various analytical review procedures when used in combination with a partitioned approach to dollar unit sampling for tests of account details. Seven analytical review procedures based on regression analysis were applied to two sets of simulated accounting data which were seeded with different patterns of known overstatement errors. Audit sample sizes for dollar unit sampling and achieved audit detection risk were then computed based on the analytical review outcomes. There were three major findings in this study. First, regression based analytical review increased audit effectiveness relative to an audit strategy that did not use analytical review. Second, the use of monthly data greatly increased the effectiveness of analytical review. Finally, regression based analytical review models were very efficient in detecting potentially material misstatements.]

[The cash recovery rate (CRR) has recently received attention as a basis for obtaining a measure of the economic rate of profitability of a firm as measured by its internal rate of return (IRR). This paper extends prior work by developing a model of the CRR-IRR relation which incorporates a commonly noted concave cash flow pattern for the firm's projects. The model forms the basis for converting an estimate of the firm's CRR into an estimate of its IRR. Empirical evidence is provided that the IRR estimates that are based upon the concave cash flow pattern are strongly associated with the IRR estimates based on the simpler cash flow profiles assumed in earlier work.]

[This research presents some descriptive evidence of how auditors perform analytical review in a complex and realistic task setting. Specifically, the research investigates how auditors who differ in terms of experience, design and conduct analytical review and revise audit programs in light of their analytical review judgments. To accomplish this purpose, a comprehensive case was administered to four auditors who performed the task while thinking aloud. The results show that both managers and seniors identified the crucial audit problems embedded in the case. However, there was little evidence that analytical review provided a basis for reducing the extent of planned substantive audit procedures even in audit areas where reduction seemed to be warranted. Also, several important behavioral differences were observed in the information acquisition and decision behavior of the managers and seniors. Some of these differences are consistent with differences found in studies of physics experts and novices can be attributed to constructs in human memory and reasoning research. Interestingly, the protocols produced almost no evidence of the use of probabilistic reasoning (e.g., Bayesian inference) by any of the auditors. However, there is evidence of their use of the kinds of reasoning processes being proposed and evaluated in artificial intelligence research.]

[A number of new types of financial instruments have appeared in recent years, many of which have characteristics of both debt and equity. Accounting standards, however, have not specified the treatment of these hybrid securities for financial reporting purposes. As a result, companies have considerable latitude in how the instruments are reported, and some instruments have been designed in part for their financial reporting implications. One such instrument is the adjustable rate convertible note (ARCN). The treatment of ARCNs for both financial and tax reporting is discussed and an approach to accounting for ARCNs and other hybrid financial instruments is proposed which focuses on the substance of the instruments.]

[This study develops a model to explain student examination performance in the first college-level financial accounting course. A multiple regression analysis explains 54 percent of the variance in examination performance and indices of aptitude and effort account for the majority of the variance explained. However, high school and previous collegiate performance, as well as previous specific and related academic experience, each account for a significant portion of the variance in examination performance above that explained by aptitude and effort. Discrepancies between the results of the present study and other published findings are discussed.]

[This paper examines the issue of model specification in cross-sectional capital market research. In particular, it is argued that the decision of whether to select a price level or price change (return) specification is a joint function of (1) the economic model of equilibrium that is assumed; and (2) the nature of the econometric properties of the data that cause OLS assumptions to be violated. The historical origins of the model specification debate are traced to focus on three compelling reasons for selecting a returns-based methodology. We conclude that the relative advantages of returns and levels methodologies are dependent upon the set of assumptions maintained by the researcher regarding the pricing relation and the econometric properties of the data used for estimation. We provide examples and an interpretation of extant accounting capital market research to help illustrate our conclusions.]

[This paper describes a field study of 28 hospital accounting information systems (HAIS) development groups designed to address the issue of "fit" between organizational context and the effective design of management accounting systems (MAS). Hypotheses are developed for studying the interaction effects of contextual and MAS design variables on performance. The findings indicate that the match between HAIS task predictability and coordination modes is significantly associated with good performance as measured by user information satisfaction.]

[A principal-agent relation is analyzed where the agent chooses an unobservable effort level and an observable level of utilization of a resource supplied by the principal. When the agent has private information about the usefulness of the principal's resource, it is shown that the optimal compensation function must include the resource level as an argument. That is, some form of "cost allocation" appears to be part of the optimal solution to the principal's problem. Further analysis shows that standard cost allocation techniques (where the agent is allocated more costs if he or she uses more of the resource) may not be efficient in motivating the agent's choices. In some circumstances, it may be optimal to pay the agent more if he or she used more of the principal's resource.]

[This Small Sample Study describes and illustrates two types of discrepancies that can occur between the change in certain balance sheet amounts as derived from comparative balance sheets and the change that is reported in the funds statement. Four possible causes for such discrepancies are discussed and disclosure policies that would help to overcome some possibly serious reporting deficiencies are suggested.]

[This study compares litigation activities of independent auditors to assess litigation as a means for making quality distinctions among auditors. The study provides a frame-work suggesting auditors with relatively low (high) litigation activity represent higher (lower) quality suppliers. The empirical analysis examines a sample of legal cases (n = 472) and resolutions for these cases (if available, n = 183). The cases involve audit-related litigation against both Big Eight and large non-Big Eight firms during 1960-1985. The results indicate that non-Big Eight firms as a group have higher litigation activity than Big Eight firms. This result is consistent with existing research supporting the Big Eight as quality-differentiated auditors. Comparisons among Big Eight firms reveal some significant differences. However, identification of particular Big Eight firms as low (high) litigation activity auditors appears sensitive to the type of analysis.]