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Article
Publication date: 27 January 2020

Babajide Oyewo, Ebuka Emebinah and Romeo Savage

Following the issuance of International Financial Reporting Standard 13 on fair value measurement (which became operational from January 2013), this study aims to…

1077

Abstract

Purpose

Following the issuance of International Financial Reporting Standard 13 on fair value measurement (which became operational from January 2013), this study aims to investigate post-implementation challenges in the audit of fair value measurement and accounting estimates in the Nigerian context.

Design/methodology/approach

Data-collection was through a structured-questionnaire administered on 400 auditors from diverse backgrounds in terms of audit firm size, international affiliation and global presence.

Findings

Empirical data obtained from 277 auditors were analysed using descriptive statistics, factor analysis, one-way ANOVA, cluster analysis, independent sample t-test and one-way multivariate analysis of co-variance. It was observed that the two highest-ranking and most-prevalent challenges of auditing fair value measurement and accounting estimates are the tendency for managers to manipulate earnings owing to the inability of auditor to effectively test fair value estimates; and the difficulty in testing unobservable inputs due to the application of assumptions and judgement in arriving at estimates by preparers of financial reports.

Originality/value

While there is no significant difference in the perception of auditors on the audit challenges associated with fair value measurement and accounting estimates, there is a significant difference in the magnitude of audit challenges faced in verifying fair value measurements and accounting estimates across industry sectors. Concerned stakeholders (including but not limited to accounting regulators, auditing standard setters, audit firms, researchers) are importuned to come up with robust and pragmatic measures to curtain these challenges, as the inability of auditors to rigorously verify fair value estimates may jeopardize the very essence of fair value measurement which is to elevate financial reporting quality.

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 1
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 9 December 2020

Chee Kwong Lau

This study examines (1) the extent of key audit matters (KAMs) reported by auditors is related to accounting estimates, (2) whether measurement uncertainty and management…

Abstract

Purpose

This study examines (1) the extent of key audit matters (KAMs) reported by auditors is related to accounting estimates, (2) whether measurement uncertainty and management bias affect auditors to do so and (3) whether the use of accounting estimates, given the measurement uncertainty and management bias reported in KAMs adversely affects the decision usefulness of accounting information.

Design/methodology/approach

Data on key audit matters, accounting estimates, measurement uncertainty, management bias, etc. were collected from the auditor's reports of 351 sample Chinese listed firms. It employs regression analyses to assess the hypotheses on issues affecting the report of these key audit matters and the impacts on the decision usefulness of accounting information.

Findings

Fair value and impairment loss estimations make up of 2.6 and 44.1% of the 606 KAMs identified, respectively. Measurement uncertainty is positively, while management bias is negatively, affecting auditors report KAMs related to accounting estimates. The use of accounting estimates in firms where their auditors reported the KAMs related to accounting estimates does not enhance the value and predictive relevance of reported earnings. The assurance works on, and reporting of, KAMs served as a “red flag” about the accounting estimates.

Practical implications

The use of accounting estimates does not always lead to enhanced decision-useful accounting information. Auditors, in their stewardship role, shall ensure that the measurement uncertainty issue is appropriately identified, addressed and verified. In addition, they shall provide an effective check-and-balance to the accounting discretion managers have in providing decision-useful information from opportunistic reporting.

Originality/value

This study examines the proposition that while the use of estimates can enhance the decision usefulness of accounting information, it can also induce measurement uncertainty and management bias into financial reporting.

Details

Asian Review of Accounting, vol. 29 no. 1
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 1 July 1995

Steven Kaplan and Philip M.J. Reckers

The dangers of management bias and the resulting increased need forauditors to be cognizant of environmental characteristics may beparticularly acute in the area of…

2981

Abstract

The dangers of management bias and the resulting increased need for auditors to be cognizant of environmental characteristics may be particularly acute in the area of accounting estimates. Accounting estimates pose relatively unique auditing problems because it is an area where management has significant discretion (to set estimates) and there is limited ability to apply traditional accounting controls. Thus auditors have difficulty obtaining conclusive evidence to challenge management′s estimates. Research examining auditors′ accounting estimate judgments, however, has been scant, especially with regard to the relationship of auditors′ assessment of materiality and risks of fraudulent financial reporting. Reports the results of an empirical study examining the reporting decisions of audit seniors and audit managers related to a client′s decision to change four accounting estimates relative to the prior year. The auditor′s task was to review the changes and to indicate whether audit adjustments proposed by the audit staff were necessary to preserve an unqualified opinion. Three environmental red flags related to management lifestyle, bonus compensation programme and internal audit department strength were manipulated between subjects. The results indicated that the direct effect of the red flags on reporting decisions was limited. The findings provided greater support for an indirect model. In the indirect model, red flags affected auditors′ assessments of management intent, which, in turn, influenced auditors′ reporting decisions in combination with assessed materiality and level of auditor experience.

Details

Managerial Auditing Journal, vol. 10 no. 5
Type: Research Article
ISSN: 0268-6902

Keywords

Book part
Publication date: 22 September 2015

Jacob Assa

Received histories present national accounts as universal, purely economic measures based mostly on theoretical foundations. This paper argues that this is an…

Abstract

Received histories present national accounts as universal, purely economic measures based mostly on theoretical foundations. This paper argues that this is an anachronistic approach to the long and uneven development of these estimates and builds on geopolitical economy to examine national income estimates as quantifications of state power. First, it reveals national income accounts to be historically and geographically contingent rather than universal, suggesting contestation instead of any hegemony or dominance of one central ideology. Second, the economic power and motivations of nation-states, rather than economic theory, are at the core of the design of national income estimates, which are used to promote states’ position in international competition as well as advocate for particular national economic policies. The history of national accounting closely tracks the rise of the nation-state, the unique phase of British hegemony, the two World Wars, the east-west competition of the Cold War, and the north-south competition of the recent two decades. To this day, revisions to national accounting systems reflect the shifting balance of power and incessant international competition.

Details

Theoretical Engagements in Geopolitical Economy
Type: Book
ISBN: 978-1-78560-295-5

Keywords

Abstract

Details

Quality Control Procedure for Statutory Financial Audit
Type: Book
ISBN: 978-1-78714-226-8

Article
Publication date: 11 May 2016

Dennis Caplan and Saurav K. Dutta

Recent public policy initiatives seek greater transparency in financial reporting through an honest, balanced and thorough management discussion of company performance in…

Abstract

Recent public policy initiatives seek greater transparency in financial reporting through an honest, balanced and thorough management discussion of company performance in the annual report. Management’s discussion invariably includes key performance indicators, such as financial ratios, relevant to external stakeholders. We model the impact of accounting estimates, assumptions, choices and errors on the risk of misleading financial ratios. This framework is illustrated through good and bad examples of financial reporting practices and by simulation of financial data of public companies. We provide a structured approach to inform policymakers, auditors and other stakeholders of the incremental financial reporting risk that accompanies current regulatory efforts.

Details

Journal of Accounting Literature, vol. 36 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 29 July 2018

Max Schreder

This paper provides a quantitative review of the literature on the repercussions of idiosyncratic information on firms’ cost of equity (CoE) capital. In total, I review…

Abstract

This paper provides a quantitative review of the literature on the repercussions of idiosyncratic information on firms’ cost of equity (CoE) capital. In total, I review the results of 113 unique studies examining the CoE effects of information Quantity, Precision and Asymmetry. My results suggest that the association between firm-specific information and CoE is subject to moderate effects. First, the link between Quantity and CoE is moderated by disclosure types and country-level factors in that firms in comparatively weakly regulated countries tend to enjoy up to four times greater CoE benefits from more expansive disclosure—depending on the type of disclosure—than firms in strongly regulated markets. Second, a negative relationship between Precision and CoE is only significant in studies using non-accrual quality proxies for Precision and risk factor-based (RFB)/valuation model-based (VMB) proxies for CoE. Third, almost all VMB studies confirm the positive association between Asymmetry and CoE, but there is notable variation in the conclusions reached when ex post CoE measurers are used.

Details

Journal of Accounting Literature, vol. 41 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 8 December 2021

Pinprapa Sangchan, Md. Borhan Uddin Bhuiyan and Ahsan Habib

The paper aims to investigate the value-relevance of changes in fair values of investment property reported under International Accounting Standards (IAS) 40 and…

Abstract

Purpose

The paper aims to investigate the value-relevance of changes in fair values of investment property reported under International Accounting Standards (IAS) 40 and International Financial Reporting Standards (IFRS) 13.

Design/methodology/approach

Multivariate regression models are used to regress cumulative market-adjusted stock returns of real estate firms on changes in fair values, along with control variables and corporate governance variables, in order to examine the research question.

Findings

Using hand-collected data from the Australian Real Estate Industry (AREI), the authors find that changes in fair values of investment property are value-relevant for equity investors. The authors further find that using unobservable inputs in an active market (Level 3 inputs) does not diminish the information content of fair values. The authors document that properties valued exclusively by directors have a significantly reduced value-relevance, whereas property valuations made collectively by both directors and independent valuers have superior value-relevance, possibly owing to the combination of inside knowledge and externally imposed monitoring. Collectively, the findings suggest that in the real estate industry, where unobservable inputs are commonly used to determine fair values of properties, the fair values determined subjectively are perceived to be sufficiently informative and relevant.

Research limitations/implications

The authors' findings have important implications for accounting standard-setters in considering whether an external valuation should be required and whether the extensive measurement-related fair value disclosure requirements are useful.

Originality/value

The study extends previous archival evidence and complements prior commentaries on experimental and analytical work in the Australian regulatory environment.

Details

Asian Review of Accounting, vol. 30 no. 1
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 16 October 2007

Graeme Wines, Ron Dagwell and Carolyn Windsor

This paper aims to critically examine the change in accounting treatment for goodwill pursuant to international financial reporting standards (IFRSs) by reference to the…

18355

Abstract

Purpose

This paper aims to critically examine the change in accounting treatment for goodwill pursuant to international financial reporting standards (IFRSs) by reference to the Australian reporting regime.

Design/methodology/approach

The paper discusses and compares the former Australian and the new IFRS treatments for goodwill. This comparison focuses on the advantages and potential complexities of the new method, with the aim of identifying the issues and challenges that preparers, independent auditors and those involved in corporate governance face in complying with the new requirements.

Findings

The paper highlights that the identification and valuation of cash‐generating units and goodwill require numerous assumptions to be made in estimating fair value, value in use and recoverable amount. Considerable ambiguity and subjectivity are inherent in the IFRS requirements.

Research limitations/implications

Findings suggest that future research should examine how financial report preparers and corporate governance mechanisms are dealing with the complex change required by the new goodwill accounting treatment and how the many critical issues involved in auditing the resulting figures are being addressed.

Practical implications

The research has practical implications for financial report preparers in identifying the issues that must be addressed in complying with the international goodwill accounting treatment. In turn, the paper highlights conceptual issues of relevance to auditors in their role of providing assurance on the resulting accounting numbers. It also has implications for others involved in corporate governance, such as audit committee members, in emphasising the areas in which they should be providing oversight of the accounting judgments. These issues are of relevance in any reporting regime based on IFRSs.

Originality/value

While much has been written about the mechanics of the new goodwill accounting requirements, there has been a lack of critical research highlighting the many problems and ambiguities that will arise in the application of those rules.

Details

Managerial Auditing Journal, vol. 22 no. 9
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 15 November 2019

Rachel Martin

This paper synthesizes existing experimental research in the area of investor perceptions and offers directions for future research. Investor-related experimental research…

Abstract

This paper synthesizes existing experimental research in the area of investor perceptions and offers directions for future research. Investor-related experimental research has grown substantially, especially in the last decade, as it has made valuable contributions in establishing causal links, examining underlying process measures, and examining areas with little available data. Within this review, I examine 121 papers and identify three broad categories that affect investor perceptions: information format, investor features, and disclosure credibility. Information format describes how investors are influenced by information salience, information labeling, reporting and accounting complexity, financial statement recognition, explanatory disclosures, and proposed disclosure changes. Investor features describes investors’ use of heuristics, investor preferences, and the effect of investor experience. Disclosure credibility is influenced by external and internal assurance, management credibility, disclosure characteristics, and management incentives. Using this framework, I summarize the existing research and identify areas that would benefit from additional research.

Details

Journal of Accounting Literature, vol. 43 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

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