In a 1993 article in Accounting and Business Research , Meier, Alam, and Pearson

Question

In a 1993 article in Accounting and Business Research, Meier, Alam, and Pearson studied auditor lobbying on several proposed U.S. accounting standards that affect banks and savings and loan associations. As part of this study, the authors investigated auditors’ positions regarding proposed changes in accounting standards that would increase client firms’ reported earnings. It was hypothesized that auditors would favor such proposed changes because their clients’ managers would receive higher compensation (salary, bonuses, and so on) when client earnings were reported to be higher. Table (below) summarizes auditor and client positions (in favor or opposed) regarding proposed changes in accounting standards that would increase client firms’ reported earnings. Here the auditor and client positions are cross-classified versus the size of the client firm.

(a) Test to determine whether auditor positions regarding earnings-increasing changes in accounting standards depend on the size of the client firm. Use = .05. (Round your expected frequencies to 2 decimal places and final answer to 3 decimal places.)

(b) Test to determine whether client positions regarding earnings-increasing changes in accounting standards depend on the size of the client firm. Use = .05. (Round your expected frequencies to 2 decimal places and final answer to 3 decimal places.)

(d) Does the relationship between position and the size of the client firm seem to be similar for both auditors and clients?

Large
Firms Small
Firms Total In Favor 13 130 143 Opposed 10 24 34 Total 23 154 177

Explanation / Answer

a.

b.

d.

No,the relation between both  position and the size of the client firm seem to be similar for both auditors and clients

Given table data is as below col1 col2 row 1 13 130 143 row 2 10 24 34 TOTALS 23 154 N = 177   ------------------------------------------------------------------

calculation formula for E table matrix E-TABLE col1 col2 row 1 row1*col1/N row1*col2/N row 2 row2*col1/N row2*col2/N ------------------------------------------------------------------

expected frequecies calculated by applying E - table matrix formulae E-TABLE col1 col2 row 1 18.582 124.418 row 2 4.418 29.582 ------------------------------------------------------------------

calculate chisquare test statistic using given observed frequencies, calculated expected frequencies from above Oi Ei Oi-Ei (Oi-Ei)^2 (Oi-Ei)^2/Ei 13 18.582 -5.582 31.159 1.677 130 124.418 5.582 31.159 0.25 10 4.418 5.582 31.159 7.053 24 29.582 -5.582 31.159 1.053 ^2 o = 10.033 ------------------------------------------------------------------

set up null vs alternative as
null, Ho: no relation b/w X and Y OR X and Y are independent
alternative, H1: exists a relation b/w X and Y OR X and Y are dependent
level of significance, = 0.05
from standard normal table, chi square value at right tailed, ^2 /2 =3.841
since our test is right tailed,reject Ho when ^2 o > 3.841
we use test statistic ^2 o = (Oi-Ei)^2/Ei
from the table , ^2 o = 10.033
critical value
the value of |^2 | at los 0.05 with d.f (r-1)(c-1)= ( 2 -1 ) * ( 2 - 1 ) = 1 * 1 = 1 is 3.841
we got | ^2| =10.033 & | ^2 | =3.841
make decision
hence value of | ^2 o | > | ^2 | and here we reject Ho
^2 p_value =0.002


ANSWERS
---------------
null, Ho: no relation b/w X and Y OR X and Y are independent
alternative, H1: exists a relation b/w X and Y OR X and Y are dependent
test statistic: 10.033
critical value: 3.841
p-value:0.002
decision: reject Ho

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