Information evaluation model, Decision making, Lens model, Feedback

Disclosures, Standard setting process, Welfare effects of disclosure, Users of disclosures

Cost variance, Multi-observation models, Investigation costs

Robert H. Ashton, Cognitive Changes Induced by Accounting Changes: Experimental Evidence on the Functional Fixation Hypothesis, Journal of Accounting Research, Vol. 14, Studies on Human Information Processing in Accounting (1976), pp. 1-17

Auditing, Materiality, Material error, Sampling plan

The work of independent auditors involves two basic activities evidence collection and evidence evaluation. Substantial agreement exists concerning the types of evidence that should be collected in particular situations and the appropriate collection techniques. The evidence-evaluation activity, however, is less susceptible to codification. As a result, the auditing profession relies heavily upon professional in evaluating audit evidence. For example, the AICPA has stated that of the independent auditor's work in formulating his opinion on financial statements consists of obtaining and examining evidential matter. The measure of the validity of such evidence for audit purposes lies in the judgment of the auditor. 1 The importance of judgment in auditing is accepted almost without question; yet auditors' judgments are seldom subjected to systematic research. A typical rationale for this situation is the AICPA's statement that 'judgment is the most important factor in the making of any audit, but in many situations it is practically impossible to write out in specific language how the auditor applies judgment. 2 The study reported in this paper was concerned with the evidence-evaluation function of independent auditing. One type of audit evidence was * Assistant Professor, University of Texas at Austin. This paper is based upon the author's doctoral dissertation; for the full report, see R. H. Ashton, Judgment Formation in the Evaluation of Internal Control: An Application of Brunswik's Lens Model (Minneapolis: University of Minnesota, 1973).

Most textbooks call convertible bonds and convertible preferred stocks hybrid securities because they have the characteristics of senior securities together with many of the attributes of common stocks. In most, if not all, balance sheets they are classified as senior securities and their claim against earnings is reported to be the coupon interest or the dividends declared.' Yet, in most cases the nominal rates of return on these securities are substantially below those of equivalent-risk nonconvertible securities. It is apparent that these nominal rates are an inadequate measure of the real cost of convertible securities to the firm.2 What then is the cost of convertibles? To what extent do published reports understate or overstate their cost? What are the important variables affecting that cost? How does the cost of debt affect earnings per share? This paper presents the results of an empirical study intended to answer those questions. It seems clear that a convertible security, either bond or stock, derives its value from the magnitude of its share of the firm's earnings, present and future. That share however is not limited to the cash payout alone; it also includes a pro-rata, per equivalent common share portion of the current period earnings retained by the firm. To the extent that earnings

That hereafter, whenever practicable and reasonable, and where the aggregate amount of notes and accounts receivable represents a significant portion of the current assets or of the total assets of a concern, confirmation of notes and accounts receivable by direct communication with the debtors shall be regarded as generally accepted auditing procedure in the examination of the accounts of a concern whose financial statements are accompanied by an independent certified public accountant's report, and that the method, extent, and time of confirming receivables or a part thereof, be determined by the independent certified public accountant as in other phases of procedure requiring the exercise of his judgmentl

Price-level accounting, Price levels, Utility function