Gerald H. Lander

The External Auditor′s Consideration of the Internal Audit Function

Statement on Auditing Standards (SAS) 65 was issued in April 1991 to clarify various aspects of the working relationship that should exist between external and internal auditors. Describes the historical development of this relationship as viewed through the promulgation of authoritative literature, reports of official committees and commissions, and prior research. Presents a survey which describes various aspects and characteristics of this relationship in the light of the provisions of SAS 65.

Models to measure goodwill impairment

Statement of Accounting Standards No. 142 [2001] superseded the former rules of accounting for amortization of goodwill under Accounting Principles Board Opinion No. 17 [1970]. Entities muxt now recognize annually impairments in the value of the good-will associated with purchased firms, rather than amortizing such expenses ratably over 40 years. This better matching of revenues and expenses provides for more valid financial statements, but also mandates accountants to select proper models to measure such impairment losses. The authors highlight some reasons for the issuance of this new standard, compare and contrast the effects of the discounted cash flows and residual income methods to measure such impairments, and suggest how to develop a conceptual model to adhere to the new authoritative provisions. (JEL M41)

Are the new rules relating to disclosures of derivative financial instruments workable

Accounting for derivatives has created uncertainties for preparers, auditors, regulators, and users of financial statements alike. The complexity and variety of instruments as well as hedging and risk management techniques make derivatives reporting a difficult subject. Developing consistent accounting rules in this area is made even more challenging since derivatives are used in conjunction with assets and liabilities that, under the current accounting system, may be carried at historical cost, fair value, or some hybrid of fair value and historical cost. Further, derivatives are used in connection with portfolios of items as well as with economic assets and exposures that may not be recorded in financial statements under the current model.

Leasing: reducing the game of hiding risk

Purpose – This paper aims to examine the status and implications of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) forthcoming standard on leases. The proposal arose from concern that many lease obligations are unrecorded on the balance sheet and that current accounting for lease transactions does not represent fully the economics of many lease transactions. Design/methodology/approach – On September 20, 2012 and September 25, 2012, the Boards decided to account for some lease contracts using an approach similar to their proposed 2010 leases exposure draft (interest and depreciation) and to account for some leases using an approach that results in a straight-line lease expense. On May 13, 2013, the Boards decided to continue to account for some lease contracts on a straight-line basis, and others on an amortization basis separate from interest expense. Identification of the type of lease requires a two-step process at lease commencement, and all lease...

An analysis of accounting measures on the performance of U.S. international corporations

Accounting measures (earnings and cash flow) have been shown to affect market performance (stock price) in U.S. firms operating domestically. In general, earnings have statistically significant explanatory power of stock price movement, albeit superior to cash flow. However, U.S.-based international corporations consolidate earnings from foreign operations. Consolidation can report significant gains (losses) from foreign transactions, as well as from the translation of foreign assets and liabilities, as currency exchange rates flucturate. Researchers are divided over the impact, if any, that such gains (losses) have on stock price. Indeed, gain (loss) is not realized until foreign currency is converted into the parent firms functional currency. Foreign operations may accumulate assets and foreign currency even while U.S. exchange rates decline. Stock analysts may consider all currencyadjusted data to be unreliable and prefer simple data such as sales. Currency-adjusted accounting measures may or may not influence market performance.

Governmental entities: Compliance and performance auditing considerations

The American Institute of Certified Public Accountants recently issued Statement on Auditing Standards (SAS) No. 69 [1996a]. This establishes two parallel hierarchies—one for the public sector (headed by the Governmental Accounting Standards Board (GASB)) and one for the private sector (headed by the Financial Accounting Standards Board (FASB)). Formerly, governmental accountants had to absorb all FASB pronouncements and then ignore some on command of the GASB. Under the provisions of SAS No. 69, only those future FASB pronouncements that the GASB specifically makes applicable to government entities will be of primary concern to governmental accountants. However, some aspects of the new standard are confusing. The GASB hierarchy of authoritative sources should be understood as having six, not five, levels and some applications—such as accounting for proprietary funds of government entities—need to be clarified by future GASB pronouncements. This study first highlights the provisions of SAS No. 69. Then, based upon the responses to a survey questionnaire, it discusses how the new SAS will affect users of the new authoritative pronouncement.

Auditing Just-in-time Systems

Abstract Materials requirement planning (MRP) has been widely used for the past decade, while Just-in-Time (JIT) is not yet implemented in a large number of companies in the United States. MRP is a planning system whereby JIT is a manufacturing philosophy which combines purchasing production and inventory control. Results of the current survey suggest that internal auditors are primarily involved in the post-implementation reviews of MRP and JIT systems.

A Queuing Model Approach to Stochastic Supply/Demand Systems

Abstract This paper is part of a series reporting initial results on developing queuing models for certain types of stochastic demand/supply systems. Interarrival time of a unit of demand or supply is exponentially distributed. Excess supply results in a positive queue, and excess demand, a negative queue. Instant pairing off’s imply that queue can be either positive, or negative, but not both at the same time. In each case, a cost per unit time is associated with a unit of excess. Objectives are to analyze queuing behavior and the possibilities of reducing and controlling shortages and/or oversupplies. Preliminary results include the following: Suppose that the rates of supply and demand are λ and μ respectively and ρ=λ/μ; that the costs per time of a unit of oversupply and shortage are c’ and c’ respectively and c=c’/c″; and that the maximum numbers of units of excesses are the same finite k. Then as k approaches ∞, the optimum ρ* which minimizes the expected total cost per unit time is an increasing fu...