Professional Documents
Culture Documents
Importance of
measurement
Campbell:
The assignment of numerals to represent
properties of material systems other than
numbers
Assignment
Assignment of
of numerals
numerals to
to objects
objects or
or events
events
according
(Stevens)
according to
to rules.
rules.
(Stevens)
2
Importance of
measurement
We examine the relationship between the fair value measurement and the
audit quality. Our evidence suggests that the fair value measurement has a
negative impact on the overall CPAs audit quality. And this negative effect
depends on the application scale of the fair value measurement.
Nowadays, large-scale application of the fair value measurement does
decrease the overall audit quality, but a modest application reflects the
intention of improving the value relevance of accounting information and
plays its proper role.
They should pay more attention to the audit of fair value and reduce the
adverse effect of fair value measurement on external audit, so that this
measurement can play its proper role as soon as possible.
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6-5
6-6
Low R2
6-7
Auditor Liability
Better measurement may reduce auditor
liability when firms become financially
distressed
6-8
Behavioural finance
Behavioural characteristics that question market
efficiency
Limited attention
Overconfidence
Representativeness
Self-attribution bias
Leading to momentum
6-9
Scales
Every measurement is made on a scale
Created when a semantic rule is used to
relate the mathematical statement to
objects or events
The scale shows what information the
numbers represent
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Scales
Nominal scales
Number used only for labels;
Numbers represent classifications;
e.g. the classification of assets and liabilities
into different classes
Ordinal scales
Rank orders objects with respect to a given
property
Intervals between the numbers are not
necessarily equal
12
Scale
Interval scale
Ratio scale
13
Nominal Scales
14
RATIO SCALE
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15
Permissible operations of
scales
Invariance of a scale means that the
measurement system will provide the same
general form of the variables, and the
decision maker will make the same
decisions
This is not the case in accounting there is
more than one accounting system
The information they provide will differ and
different decisions will be made
16
Types of measurement
There must be a rule to assign numbers
before there can be measurement
The formulation of the rules gives rise to a
scale
Measurement can be made only on a scale
17
Fundamental
measurements
Numbers are assigned by reference to
natural laws
Fundamental properties are additive
18
Derived measurements
Is one that depends on the measurement of
two or more other quantities
Depends on known relationships to
fundamental properties
19
Fiat measurements
Typical in social sciences including
accounting
Based on arbitrary definitions - e.g. of profit
Numerous ways in which scales can be
constructed
May lead to poor levels of confidence in the
scale e.g. there are hundreds of ways to
measure profit
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Reliable measurement
22
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23
Accurate measurement
Consistency of results, precision and
reliability do not necessarily lead to
accuracy
Accuracy has to do with how close the
measurement is to the true value of the
attribute measure - representation
True value may not be known
24
Accurate measurement
Many accounting measurements are on a
ratio scale
This is the most informative scale
Weakest theoretical foundation as they are
fiat measurements
25
Sources of error
The sources of error include the following:
Measurement operations stated imprecisely
Measurer
Instrument
Environment
Attribute unclear
Risk and uncertainty
We need to establish limits of acceptable
error
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Measurement in
accounting
29
Measurement in
accounting
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31
32
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33
34
transaction based
revenue recognition
matching
profit measurement
35
36
Criticisms of Historical
Cost
Objective of accounting
Information for decision making
Basis of historic cost
Matching
Notions of investor
needs
37
38
Recognition principle
violates the conservatism principle - but actual
phenomena
are holding gains profits or revaluation
adjustments?
Technological change
appears to ignore technological advances
39
International accounting
standards and current costs
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Auditor Liability
6 - 43
Conclusions