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

PART A.

Given table data is as below

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calculation formula for E table matrix

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expected frequecies calculated by applying E - table matrix formulae

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calculate chisquare test statistic using given observed frequencies, calculated expected frequencies from above

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set up null vs alternative as

null, Ho: independent for auditor positions regarding earnings-increasing changes.

alternative, H1: dependent for auditor positions regarding earnings-increasing changes.

level of significance, = 0.05

from standard normal table, chi square value at right tailed, ^2 /2 =3.8415

since our test is right tailed,reject Ho when ^2 o > 3.8415

we use test statistic ^2 o = (Oi-Ei)^2/Ei

from the table , ^2 o = 10.0328

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 3.8415

we got | ^2| =10.0328 & | ^2 | =3.8415

make decision

hence value of | ^2 o | > | ^2 | and here we reject Ho

^2 p_value =0.0015

ANSWERS

---------------

a.

test statistic: 10.0328

critical value: 3.8415

p-value:0.0015

decision: reject Ho

exists a relation b/w X and Y OR dependent for auditor positions regarding earnings-increasing changes.

PART B.

------------------------------------------------------------------

Given table data is as below

------------------------------------------------------------------

calculation formula for E table matrix

------------------------------------------------------------------

expected frequecies calculated by applying E - table matrix formulae

------------------------------------------------------------------

calculate chisquare test statistic using given observed frequencies, calculated expected frequencies from above

------------------------------------------------------------------

set up null vs alternative as

null, Ho: independence for client positions regarding earnings-increasing changes.

alternative, H1: dependent for client positions regarding earnings-increasing changes.

level of significance, = 0.05

from standard normal table, chi square value at right tailed, ^2 /2 =3.8415

since our test is right tailed,reject Ho when ^2 o > 3.8415

we use test statistic ^2 o = (Oi-Ei)^2/Ei

from the table , ^2 o = 13.113

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 3.8415

we got | ^2| =13.113 & | ^2 | =3.8415

make decision

hence value of | ^2 o | > | ^2 | and here we reject Ho

^2 p_value =0.0003

ANSWERS

---------------
b.
test statistic: 13.113,
reject Ho, no evidence that independence for client positions regarding earnings-increasing changes.
critical value: 3.8415
p-value:0.0003
decision: reject Ho

c.

yes

col1 col2 row 1 13 130 143 row 2 10 24 34 TOTALS 23 154 N = 177

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