Monetary unit sampling: Improving estimation of the total audit error

In the practice of auditing, for cost concerns, auditors verify only a sample of accounts to estimate the error of the total population of accounts. The most common statistical method to select an audit sample is by monetary unit sampling (MUS). However, common MUS estimation practice does not explicitly recognize the multiple distributions within the population of account errors. This often leads to excessive conservatism in auditors' judgment of population error. In this paper, we review the common MUS estimation practice, and introduce our own method which uses the Zero-Inflation Poisson (ZIP) distribution to consider zero versus non-zero errors explicitly. We argue that our method is better suited to handle the real populations of account errors, and show that our ZIP upper bound is both reliable and efficient for MUS estimation of accounting data.     

Some Guidelines for Acquisitions

Since its introduction by Dworkin and Grimlund (1984), the moment bound has emerged as a less conservative method of evaluating monetary-unit samples than existing methods for estimating the total error amount in substantive auditing. Arthur Andersen has recently adopted it in place of the Stringer bound (Felix et al., 1990). In this paper we examine its performance with unrestricted random, cell and sieve sampling; the behaviour of the sampling methods is compared by means of an empirical investigation using two new accounting populations. Our results show that the method of sample selection has no effect on the tightness of the moment bound, but does appear to affect the reliability and precision. While the moment bound is reliable in most cases, some reliability problems arise and these are most frequent with unrestricted random sampling. We also observe substantial gains in the precision of the moment bound with cell and sieve sampling in populations with large line items. The reduction in sample size resulting from these gains is demonstrated using the design effect (Kish, 1965).     

Ranked set sampling: an auditing application

This study compares the statistical precision of simple random sampling with balanced ranked set sampling in an inventory valuation scenario. Computer simulation is used to calculate standard errors for the ranked set sampling mean, and those standard errors are then compared to the corresponding standard error achieved under simple random sampling. Results indicate that required sample sizes for a given precision are much smaller under ranked set sampling than under simple random sampling. This implies that simple random sampling is inferior to ranked set sampling in auditing scenarios involving the measurement of time consuming or difficult to gather data such as inventory observations, receivable confirmations, etc. Accordingly, auditors using ranked set sampling in lieu of simple random sampling can achieve the significant cost reductions associated with smaller sample sizes without sacrificing audit quality. This is a significant finding because current auditing practice is still using the simple random sampling methodology.     

Blockchain as the Database Engine in the Accounting System

This paper examines the prediction that blockchain technology will transform accounting and the profession because transactions recorded on a blockchain can be aggregated into financial statements and confirmed as true and accurate. We argue that blockchain technology affects the database engine of the accounting information system (AIS) through digitisation of the current paper‐based validation process. In a blockchain‐based AIS, accountants will no longer be the central authority but will remain the preparer of financial reports required by regulations; they will continue to influence policies such as the choice and accreditation of validators and serve as validators of last resort. Audit evidence still needs to be gathered for rendering of an audit opinion in a blockchain‐based AIS. While digitisation of the validation process reduces the error rate and lowers the cost of vouching and tracing, and immutability of blockchain data reduces the incentive and opportunities for fraud, a blockchain‐based AIS alone does not guarantee that financial reports are true and fair. Lower error rates and reduced incentives for accounting fraud in a blockchain‐based AIS are expected to improve audit quality. This prediction will need to be empirically tested when blockchain‐based AIS become available. Using the three‐tier architecture of the AIS, this paper addresses the gap in the literature that misses how characteristics of blockchain technology can influence the implementation of a blockchain‐based AIS with related implications for the accounting profession.     

Using past experience to optimize audit sampling design

Optimal sampling designs for audit, minimizing the mean squared error of the estimated amount of the misstatement, are proposed. They are derived from a general statistical model that describes the error process with the help of available auxiliary information. We show that, if the model is adequate, these optimal designs based on balanced sampling with unequal probabilities are more efficient than monetary unit sampling. We discuss how to implement the optimal designs in practice. Monte Carlo simulations based on audit data from the Swiss hospital billing system confirms the benefits of the proposed method.     

会计师事务所人力资本特征与审计质量——来自中国资本市场的经验证据

人力资本在会计师事务所中具有十分重要的意义。本文利用2009年我国会计师事务所及其非金融类上市公司客户的数据,以操控性应计额度量审计质量,检验会计师事务所中注册会计师所占比重以及注册会计师的学历、年龄、参加行业领军人才培训情况等人力资本特征对审计质量的影响,结果发现,在我国本土事务所中,注册会计师的年龄以及入选行业领军人才培训计划的人数与正向的操控性应计额之间存在显著的负向关系,这表明,会计师事务所中注册会计师的经验丰富程度和对培训的重视程度对于抑制客户的正向盈余管理行为、提高审计质量具有积极作用。文章没有发现会计师事务所中注册会计师的比重以及注册会计师中高学历者所占比重与审计质量之间存在显著关系的证据。     

OLIVE: A SIMPLE METHOD FOR ESTIMATING BETAS WHEN FACTORS ARE MEASURED WITH ERROR

We propose a simple and intuitive method for estimating betas when factors are measured with error: ordinary least squares instrumental variable estimator (OLIVE). OLIVE performs well when the number of instruments becomes large, whereas the performance of conventional instrumental variable methods becomes poor or even infeasible. In an empirical application, OLIVE beta estimates improve R² significantly. More important, our results help resolve two puzzling findings in the prior literature: first, the sign of average risk premium on the beta for market return changes from negative to positive; second, the estimated value of average zero‐beta rate is no longer too high.     

Panel Cointegration Analysis of Audit Pricing Model

This paper addresses two issues that arise from testing and estimating cointegration in accounting research. The first issue is the failure to use more powerful cointegration tests by earlier researchers. This has led to the problem of low test power in the cointegration procedures employed in the earlier accounting literature. Another issue that has not received much attention in earlier studies of audit pricing is the endogeneity bias that arises from the endogenous nature of the regressors. Commonly used regressors such as auditee size and auditee complexity are endogenous and are often related to audit fees through a system of simultaneous equations. Endogeneity bias suggests that the conventional OLS estimators are biased.Using more powerful panel sample estimation procedures, we find that elasticities of total assets are in general under-estimated in the earlier studies when the conventional OLS method was used. We also find that the earlier studies tend to under-state the effects of the foreign subsidiary ratio and over-state the effect of the ratio of account receivables to total assets on audit fees.JEL Classification: C33, M41     

Harmony, Statistical Inference with the Herfindahl H Index and C Index

The Herfindahl H index and C index provide measures of harmony of accounting measurement practices by summarizing the extent to which companies use the same accounting practice. While the values of these indices are compared to obtain some idea concerning the relative harmony of accounting practice, standard errors for these estimates are not generally provided. That is, an index is calculated from a sample but no guidance is provided concerning likely values of the index in the population from which the sample was drawn. The present article fills this gap in the literature by providing formulae to estimate the standard error of the H and C indices calculated from a sample. The formulae are illustrated with several examples from the literature to show how conclusions are either enhanced or modified by the addition of these standard errors. It is shown that while both indices are biased, this bias is generally negligible. It is hoped that in future authors will quote not only the value of the index itself but also the standard error so differences between index values (both within and between studies) can be judged as being either significantly different or explainable by sampling variation alone.     

The impact of voluntary audit and governance characteristics on accounting errors in private companies

This paper examines the extent to which the audit and corporate governance characteristics of UK private companies are associated with defective accounting information. Despite the economic importance of private firms, relatively little is known about their financial reporting and governance characteristics. Using a large sample of UK private companies, we examine the effects of voluntary audit, board gender balance and financial expertise on the likelihood of errors occurring in published annual accounts. Our results indicate that audited accounts are approximately half as likely as unaudited accounts to contain errors. In addition to contributing to recent academic research in this field, our findings are likely to be of interest to policy makers, who are considering exempting more firms from mandatory audit. We also find that gender diversity among board members is positively associated with the accuracy of accounting information, though our primary measure of directors’ financial expertise has no significant effect.     

Does the choice of estimator matter when forecasting returns?

While the literature concerned with the predictability of stock returns is huge, surprisingly little is known when it comes to role of the choice of estimator of the predictive regression. Ideally, the choice of estimator should be rooted in the salient features of the data. In case of predictive regressions of returns there are at least three such features; (i) returns are heteroskedastic, (ii) predictors are persistent, and (iii) regression errors are correlated with predictor innovations. In this paper we examine if the accounting of these features in the estimation process has any bearing on our ability to forecast future returns. The results suggest that it does.     

The audit expectation gap: existence,causes, and the impact of changes

Recent regulatory initiatives targeting the statutory audit regime support the notion that the audit expectation gap is still a driver of change. This study seeks to analyse causes of the gap as well as the impact of proposed changes to the current statutory audit regime using an approach that differs from those used in prior literature. This approach allows us to attribute the audit expectation gap under the current regime to a failure of the public, the standard-setter, or the auditor. Based on a questionnaire survey conducted in 2011 in Germany, we find the public to have exaggerated expectations of auditors' responsibilities under current standards. Other causes of the gap relate to the public's difficulty in assessing the performance of auditors, but also to deficiencies in auditors' performance. In addition, we find that auditors are not fully aware of their responsibilities. Increasing the information content of the audit opinion is expected to narrow the gap. By contrast, recent proposed changes, such as mandatory rotation and a ban on non-audit services, may reduce the gap only to a lesser extent. Overall, it can be shown that the audit expectation gap is by its nature a persistent phenomenon comprising complex social aspects and interactions with changing accounting requirements, such as increased uncertainties in accounting estimates.     

Effective board monitoring over earnings reports and forecasts: Evidence from CFO outside director appointments

Prior evidence that firms adjust their board structure following accounting restatements suggests that firms expect the board to effectively monitor the firm’s financial accounting system. However, little is known about signals firms use to identify monitoring weaknesses or the types of individuals firms appoint to improve the quality of monitoring. We expand on Ghannam, Bujega, Matolcsy, and Spiropolous (2019)’s evidence that firms appoint directors with accounting experience after financial fraud by investigating whether firms that file restatements or issue highly inaccurate earnings forecasts appoint individuals with CFO experience (i.e., a subset of accounting experts) to their audit committee. We find that firms are more likely to appoint an outside director with CFO experience to the audit committee when they have recently restated earnings and when they have higher prior management forecast error. We also find that the appointment of a CFO outside director to the audit committee is followed by a lower likelihood of restatement and more accurate management forecast. Together, our results suggest that firms respond to accounting failures by appointing outside directors with CFO experience. Thus, we provide insight into the signals firms use to identify weaknesses in the monitoring of the accounting function and the types of expertise firms value in addressing those weaknesses.     

Evidence About Auditor–Client Management Negotiation Concerning Client's Financial Reporting

We develop a model of auditor-client accounting negotiation, using the elements of negotiation examined in the behavioral negotiation literature, elaborated to include accounting contextual features indicated in the accounting literature and suggested by interviews with senior practitioners. We use a questionnaire structured according to the model to describe the elements, contextual features and associations between the two groups in a sample of real negotiations chosen by 93 experienced audit partners. The paper demonstrates important aspects of the sampled accounting negotiations and makes suggestions for further empirical and model development research.     

公共品视角下的审计委托模式研究

现行审计委托模式是造成“独立审计不独立”,进而导致审计失败的主要原因。现代企业的“社会企业”特征,使会计报表及其审计信息具有公共品的属性,审计失败很大程度上是会计报表审计信息这一公共品私人供给模式的失败。公共品的非竞争性和非排他性特征决定了其公共供给模式较私人供给模式更有效率;税务机关作为特殊的公共部门,令其作为会计信息审计的委托人在独立性、激励和实践上更具优势。当然,会计报表审计的税务机关委托模式作为一个新的审计委托模式,其制度需不断完善。     

On the Relationship of Stewardship and Valuation—An Analytical Viewpoint

Agency theoretical literature in accounting has frequently stressed possible difficulties in pursuing stewardship and valuation usefulness simultaneously. However, recent empirical evidence has revealed a significantly positive correlation between the two objectives. These empirical findings provide support for the IASB/FASB's decision to encompass stewardship in valuation usefulness in their revised conceptual framework. The objective of our paper is to identify factors influencing the stewardship/valuation relationship by using an analytical model. In a Linear Exponential Normal (LEN) setting we focus on the characteristics of an accounting system, in particular relevance, freedom from error and freedom from bias, the latter two according to IASB/FASB being components of representational faithfulness. We show that accounting quality, comprising relevance and freedom from error, has similar effects on valuation and stewardship usefulness. However, we identify conditions under which there is no perfect mapping from stewardship to valuation. Moreover, discretion in the accounting system has different consequences for both objectives as it does not affect valuation usefulness while it entails potentially negative effects on stewardship. Thus, we raise doubts in relation to the standard‐setters' view that stewardship is automatically met by a focus on valuation usefulness.     

The Relationship Between Assessments of Internal Control Strength and Error Occurrence,Impact and Cause

Planning judgments concerning the nature, extent and timing of evidence are critical to an audit's effectiveness and efficiency. The auditing literature suggests that knowledge of the strength of a client's internal controls in various cycles is an important consideration in such judgments, since the controls' strength is expected to affect the likelihood and nature of financial statement errors. This study examines the occurrence, financial impact and cause of detected misstatements as related to the assessed strength of internal controls. Data on detected errors were gathered from a random, cross-sectional sample of 186 audit agreements. Auditors reported detailed information on 368 audit adjustments, representing 731 misstatements to individual accounts. The results indicated that as assessed internal controls weakened, the frequency of adjustments increased and adjustments were more likely to have an effect on income. However, error magnitude did not differ across control strength settings. Errors were more likely to reflect understatement of assets and liabilities when controls deteriorated, while when controls were strong, assets and liabilities were more frequently overstated. Finally, the causes of adjustments reflect a greater frequency of ‘routine’ errors as controls deteriorate, although cut-off errors were relatively common across all control settings. These results suggest that different audit strategies are appropriate in response to variations in controls.     

与公允价值确认相关的审计证据研究

与公允价值相关的特殊会计业务在新会计准则中占有很重要的地位,也必将对审计业务形成一定程度的冲击。本文着眼于与公允价值相关的会计业务,侧重于政府审计机构,从审计证据的角度对如何实施与此相关的审计业务进行了探讨。本文结合公允价值业务对由此形成的特殊原始凭证及其与政府审计的关系进行了分析;以此为基础,对与公允价值确认有关的审计证据进行了分类分析,对相关审计证据的规范化进行了探讨。     

A new microstructure noise index

We introduce a new microstructure noise index for financial data. This index, the computation of which is based on the p-variations of the considered asset or rate at different time scales, can be interpreted in terms of Besov smoothness spaces. We study the behavior of our new index using empirical data. It gives rise to phenomena that a classical signature plot is unable to detect. In particular, with our data set, it enables us to separate the sampling frequencies into three zones: no microstructure noise for low frequencies, increasing microstructure noise from low to high frequencies, and some kind of additional regularity on the finest scales. We then investigate the index from a theoretical point of view, under various contexts of microstructure noise, trying to reproduce the facts observed on the data. We show that this can be partially done using models involving additive correlated errors or rounding error. Accurate reproduction seems to require either both kinds of error together or some unusual form of rounding error.     

应计利润计量偏差及对识别盈余管理的影响——基于计量信息相关性分析和中国制造业上市公司经验验证

应计利润反映了收付实现制与权责发生制的差异,应计利润的计量在会计理论和实证研究中有很广泛的应用。本文通过分析两种广泛采用的应计利润计量方法发现,在我国现行会计制度下,这些方法所产生的计量结果与因权责发生制而产生的应计利润不存在完全的相关性。我们探讨了由此而产生的计量偏差及对判断盈余管理行为的影响。经验验证的结果表明:在截面 Jones 修正模型下,(1)以上计量方法产生的反常应计利润是盈余管理的有偏估量,可能导致在判断盈余管理行为时发生第一类和第二类错误;(2)修正计量方法所产生的计量结果更合乎应计利润的概念,体现出更好的相关性;产生的反常应计利润能更准确地反映盈余管理行为。