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Accounting Theory - Summary Chapter 6

Accounting Measurement System

LO 1 - Income and Capital Measurement

Three main income and capital measurement systems:
1. Traditional historical cost system → not systematically codified as the fundamental basis for
measuring capital, and for recording and reporting the economic and related activities of an
2. Current cost accounting
a. Methodical presentation of a fair value accounting system → based on the concept of
financial capital maintenance, the choice of the capital concept significantly affects the derived
measure of profit
b. Used selling prices or exit values to derive measures of income and capital

LO 2 - Historical Cost Accounting

 Objective Accounting
Accountability is seen to be the most critical objective of the reporting function → the
stewardship function of managers was seen as the focus of attention of accountants in reporting
to external parties (what management has done with the funds entrusted to them).

 Capital and Profit

Capital (assets minus liabilities) → where all assets and liabilities are valued at their historical
purchase cost. Thus, income is the increment in historical cost capital at the end of accounting

Income indicated the accomplishments of the firm for the given period, expenses represents the
efforts expended and profit correlates with the effectiveness of the firm as an operating unit.

 Matching of costs theory

The historical cost accountant keeps track of the flow costs. As the firm purchase goods and
services, the accountant’s task is to trace the movement of costs and attach (match) them to the
revenues received as they flow through the business. This matching concept which guides the
accountant in deciding which costs are to be considered expenses. Terms such as ‘expired costs’
for expenses and ‘amortized costs’ for non-monetary assets stem from the costs attach theory as
applied to the allocation of historical costs.

 Conservatism
Conservative matching procedures: expenses should be allocated as soon as possible, while
revenues should not be recognized until there is a high probability that they will be received. The
conservatism concept reinforces the transaction approach to accounting (a transaction must be
evidenced by either credit or cash) and the non-recognition of events that do not result in such a
transaction (such as price increase).

 Arguments for historical cost accounting

o Historical cost is relevant in making economic decisions.
o Historical cost is based on actual, not merely possible, transactions.
o Throughout history, financial statements based on historical cost have been found to be
o The best understood concept of profit is the excess of selling price over historical cost.
o Accountants must guard the integrity of their data against internal modifications
→ Records of past transactions are necessary for accountability and as long as
accountability is important, historical cost must be used.
o Current cost or exit price isn’t really useful to be a base for profit information.
o Changes in market prices can be disclosed as supplementary data.
o There is insufficient evidence to justify rejection of historical cost accounting.
 Criticisms of historical cost accounting

Objective of Accounting

In historical cost accounting, the objective of providing useful information for economic decision
making is taken to mean providing information on the stewardship function of management. Although
important, this is a relatively narrow interpretation of the objective. A decision-usefulness approach
calls for a ‘forward-looking’ position rather than a preoccupation with the past. Furthermore,
information on the stewardship function does not necessarily restrict accountability to the original
amounts invested directly or indirectly by equity holders. Investors are also interested in knowing
about the increases or decreases in the value of their investments as represented by the net assets of
the company. Further, historical cost accounting fails in its underlying function of providing objective

Information for Decision Making

Proponents of historical cost argue that managers need historical data in order to evaluate their past
decisions as they contemplate future commitments. Edwards and Bell argue that a proper evaluation
of past decisions must entail a division of the total profit in a given period between profit from
operating activities and profit from gains (or losses) due to holding assets or liabilities while their
prices changed. Further, the operating profit and holding gains must be separated into the element that
was expected and the element that was a surprise. Profit reported under historical cost has no such
‘prospective’ interpretation. Rather, it is entirely ‘retrospective’. After the year of acquisition,
historical costs do not correlate with the events of that year. It is a fiction created by accounting
procedures to believe that historical costs are entirely related to current operations. To match
historical costs against current revenues does not allow for the division of the total profit into its
operating and holding components. In addition, historical cost overstates profit in a time of rising
prices because it offsets historical costs against current (inflated) revenues. Thus, its relevance for
decision making is highly questionable.

Basis of Historical Cost

The supposition is that the life of the firm is indefinite, so that normal expectations concerning the
non-monetary items will be fulfilled. Sterling questions the validity of the assumption:

No business has ever continued ‘indefinitely’ into the future – this makes it difficult to build an
evidential case for a projection of continuity.


The matching concept requires that when revenues are earned, the expenses incurred in earning those
revenues are matched (offset) against the revenues to calculate profit. Thomas argues that statements
about matching, and in particular allocation of costs, are ‘incorrigible’, that is, they are not capable of
being verified or refuted. One of the consequences of the matching concept is that it relegates the
balance sheet to a secondary position -- it becomes merely a summary of balances that result after
applying the rules to determine profit; it serves mainly as a repository of unamortized costs.

Notions of Investor Needs

Historical cost accounting has focus on determining net profit that causes either a distortion or
concealment of important company disclosures.

Whitman and Shubik argue that the problem arises because the goals of conventional historical cost
accounting are ill-conceived; that:

1. Accountants have a naive, simplistic view of investors and their needs

2. Accountants accept the old-fashioned, fundamentalist view of how companies and their
shares should be analyzed.

Share market analysis and corporate analysis is different. Share market analysis consists mainly of
trying to ascertain what other investors are thinking and thus not really concerned about corporate
facts, but about the psychology of the market. According to Whitman and Shubik, the reason for this
emphasis on investor psychology rather than corporate reality are that:

1. Investors usually have little knowledge about a company, its management, its policies and
objectives, its opportunities and problems
2. Investors as shareholders take a passive role because they are in no position to change the
way the company’s resources are used
3. Investors deal with highly marketable securities and therefore move in and out of situations
4. Investors develop a short-term view because the economics of share market investing is
directed towards that end. Psychology has a greater effect on market price in the short term.

Historical cost accounting practices emphasize current rates of return rather than long-term
profitability, and investors are assumed to be naive and thus induces creative financial reporting.

LO 3 - Current Cost Accounting

There are 2 systems: Edward and Bell system, which is based on the concept of financial capital
maintenance; and current cost system which uses physical capital maintenance and the entity concept.

Objective of Current Cost Accounting

Current cost accounting (CCA) is an accounting system in which assets are valued at current market
buying prices and profit is determined by allocation based on current costs. To answer what is the
objective of current cost accounting, one assumption we can make is that managers of a firm want to
maximize company’s profit. Edward and Bell express fundamental problem in terms of 3 questions:

1. What amount of assets should be held at any particular time? (expansion problem)
2. What should be the form of these assets? (composition problem)
3. How should the asset be financed? (financing problem)

For accounting information to be useful in decision making, it must measure the actual events of a
period as accurately as possible. Thus, accounting information therefore serves 2 purposes:

1. Evaluation by managers of their past decisions in order to make the best possible decisions
for the future
2. Evaluation of managers by shareholders, creditors and others.

Concept of Business Profit and Financial Capital

With regard to profit, management often faces 2 decisions:

1. Holding decisions about whether to hold assets and liabilities or to dispose of them
2. Operating decisions about how to use and finance the entity’s operations

In order to evaluate both decisions, Edwards and Bell offer a profit concept that they call ‘business
profit’ comprising (1) current operating profit (the excess of the current value of the output sold over
the current cost of the related inputs and (2) realisable cost savings (the increase in the current cost of
the assets held by the firm in the current period). The term we use for realisable cost savings is
‘holding gains/losses, which can be realised or unrealised. Capital is a real financial proprietorship
concept which means that profit is determined after restating opening buying values (capital) at the
general price level; that is, profit is the increase in business profit and holding gains and losses after
adjusting for any increases of decreases in the general price level.

Holding Gains and Losses

The concept of business profit separates holding gains/losses from operating gains/losses. Holding a
certain composition of assets and liabilities is one way management tries to enhance the firm’s market
position. They want to know if these holding activities are successful. Under historical cost
accounting, gains are recorded only when the assets are disposed of. Therefore, determining whether
management’s holding activities are successful or not is virtually impossible unless assets are bought
and sold in the same period.

Why Holding Gains are a Component of Profit?

Edwards and Bell believe that holding gains represent a saving attributable to the fact that the input
was acquired in advance of use.

1. A firm benefits from the increase in the price of its assets because, otherwise, a greater cash
outflow would be necessary if it were to purchase them now (Revsine).
2. A cost saving measures a firm’s cash position advantage relative to other firms in the industry
that were not fortunate to hold the given asset while its price rose. When these other firms do
buy the asset, they will have to do so at higher prices (Revsine).
3. The appreciation of value is an actual economic phenomenon that could be realised if the firm
were to sell the asset. However, some accountants argue that a company purchases most
assets to use in its operations, regardless of price changes. Therefore, the possible liquidation
of the asset is unrealistic.
4. Changes in the current cost of the given asset reflect changes in the future cash flows
expected to be generated from the use of the asset. This current cost profit is a lead indicator
of future cash flows. The theoretical justification of this relationship is the connection
between current cost profit and economic profit.

Economic profit can be divided into 2 component parts: expected profit/distributable cash flow
(market rate of return x beginning value of net assets) and unexpected profit (sporadic increases or
decreases in present value of net assets due to change in expectations regarding the level of future
cash flows). In a perfectly competitive economy, current cost profit is virtually identical to
economic profit. Including holding gains as a component of profit reflects a financial capital view:
any amount at the end of the period that exceeds the amount invested at the beginning of the period,
excluding additional investments by and distributions to owners, is profit. Holding gains are part of
profit, RoI is that sum of money in excess of the amount invested (adjusted by inflation).

LO 4 - Financial Capital versus Physical Capital

From a practical point of view, the main differences between the financial capital concept and the
physical capital concept is whether or not holding gains (or losses) are included in profit. In
quantitative terms, the difference between two view points is that holding gains are included in profit
under financial capital and excluded under physical capital.

In support of physical capital

Capital is the physical unit denoting the firm’s operating capability. There are no holding gains
included in profit under physical capital because it was considered as capital maintenance adjustment.
The inclusion of holding gains as profit is based mainly on two arguments:

· cost saving

· represent increases in the future cash flow of the asset in question

Samuelson argues that current cost should be a capital adjustment and cost saving are an opportunity
gain resulting from taking one course of action as opposed to another. But the alternative was forgone
when the actual course of action was taken. Conceptually, profit relates to net cash flows. Samuelson
wonders why cost saving should be part of profit when they are neither realized cash flows nor
expected cash flow but forgone cashflow. The assumption is that changes in current cost are
positively correlated with changes in the net realizable value of the asset. For non-current asset,
individual cash flow can’t be identified because the cash flow attributed to non-current asset are
represented by cash flows realized from the sale of the output of the firm. Physical capital
maintenance is based on the theory of optimum resource allocation and obtaining the required rate of
return on resource input.

Major Features of The Physical Capacity System

Capital Maintenance

If there is no technological change, capital maintenance requires that the initial physical work of net
asset is retained. Using this concept, sufficient funds are maintained within the firm to finance all
asset replacement from expense recovery and can be used to calculate prices that must be paid to
acquire inputs and calculate minimum price at which firm is willing to sell its output.

Valuation Principles

1. Non-Monetary Items

The value of non-monetary items will be adjusted by market forces in nominal dollar terms. For B/S,
non-monetary assets should be valued and shown at their current cost. Values are obtained by
references to :

· Current market buying prices

· Specific indexes where market prices are unavailable

· The service potential of an identical or like item for superseded or specialized assets.

When non-monetary asset is restated, the adjustment is made to equity section. However, when a
decrease is permanent, then the debit adjustment is made straight to the I/S.

2. Monetary Items and Loan Capital

Monetary items should be split into two different components. The first one is based on the entity
concept and comprises all monetary items that are not loan capital. When the application of specific
input indexes is not practical/cost effective, the use of general price indexes is recommended. The
second one is based on the gain and losses on loan capital which are calculated to assess the extent to
which shareholders have benefited from the entity having used long-term loan capital to fund
operations. A general price indexes should be use for calculations.

3. Non-Monetary Asset Bought and Sold on The Same Market

Usually held for profit-generating purposes or for resale at a capital gain. The capital gain of an entity
is enhanced or reduced by the reinvestment ability of these assets. If the value of the assets increases
at a greater rate than inflation, the asset debited with the price increase, the inflation adjustment is
credited to the current cost reverse and any gain, over and above inflation, is credited to the I/S. If loss
occurs, the entries are reversed.
Arguments For and Against Current Cost

Recognition Principles

1. Advocates of historical cost accounting : current cost accounting violates the conservatism principles
that a profit should only be recognized as the time a non-monetary asset is disposed of.

2. Proponents of current cost : unrealized holding gains represent actual free movement phenomena
occurring in the current period and therefore should be recognized if there is sufficient objective
evidence to support the price changes.

3. Historical Cost and Physical capital theorists : holding gains should not be recognized.

Objective of Current Cost

For item whose market prices are relatively easy to obtain, the objectivity of their current cost may be
acceptable to accountants. Ascertaining the current cost of non-current asset involves some complex
issues. The current cost can be obtained from second-hand dealers. For non-current asset where no
market prices are available, appraisals, calculation of reproduction costs and use of index numbers
will be necessary.

Technological Changes

Current cost has been criticized because it appears to ignore technological advances.

More Specific Criticism

Advocates of Historical Cost

Reject current cost accounting because it violates the traditional realization principle. A related
problem is the subjectivity of determining the amount of the increase cost. If there is no reliable
second-hand market, the basis for determining the current cost of a fixed asset used by the firm must
be the new asset expected to replace the old.

Advocates of Exit Price

Term ‘cost’ implies the opportunity cost or sacrifice of the next best alternative. The current sacrifice
faced by a company is to sell the asset rather than use it, but not to buy it because the company
already has it. Therefore, current cost, the price to purchase item, is not the relevant amount. It is the
exit price that is the logical expression of opportunity cost.

Exit price advocates insist that current cost accounting entails a mathematical problem of additivity
because models recommended for practice involve a variety of measurement methods. Then,
Chambers explains that the amounts of assets must be of the same kind as the amount of liabilities.
They must be money amounts or the money equivalents of non-money assets at balance date. The
money equivalents of non-money assets are the net cash values of those assets athe balance date.
Chambers also argues against the use of specific price indexes.

Advocates of exit price accounting believe that current cost information is irrelevant to most
investment decisions.

LO 5 - Exit Price Accounting

 Income and Capital
Exit price accounting is a system of accounting which users market selling price to measure the
firm’s financial position and financial performance.
Two majors departures from conventional historical cost accounting:
o The values of non-monetary assets are adjusted to measure changes in market selling prices
specific to those assets and they are included in income as unrealised gain
o Changes in the general purchasing power of money are taken into consideration when
measuring financial capital and the results of operation

 Objective of accounting
o Adaptive decision making → the firm survives and continues operations by having the
ability to go into the marketplace with cash to take advantage of opportunities as they arrive.
The assumption is that the business world is dynamic and business must adapt to survive.

 Arguments for exit price accounting

o Providing useful information → shareholders couldn’t learn the current values of the
assets of the companies, and at a disadvantage compared with insiders who did have the

Workable compromise to value asset:

 marketable assets at market price (exit price)
 non-marketable reproducible assets at replacement costs
 occasional non-marketable, non-reproducible assets at historical cost

o Relevant and reliable information → to be relevant, information must be useful in the

decision models of accounting report users. The problem is to select an appropriate decision
model by assessing the ability of the model to predict the consequences of currently
available alternative courses of action.

o Additivity → the valuation of all elements in the balance sheet and income statement at their
money equivalents (exit values), provides one rule that can be applied consistently to any

o Allocation → the financial statements are allocation-free, and report changes of assets
inflows and changes in the exit values of a firm’s assets and liabilities in a given period.

o Reality → exit price accounting involves references to real-world examples, because every
figure refers to a present, actual market price.

o Objectivity → exit values revealed less dispersion than carrying amount

o A measure of risk → exit price can also be an indication of the financial risk of purchasing
an asset. If exit prices rise dramatically, the opportunity cost of return increases and it must
be operated more efficiently.

 Arguments against exit price accounting

o Profit concept → exit price measurement requires a concept of profit where the plan is
always to maximise the cash equivalent of the net assets over successive short-term periods
and provides relevant information only if the company plans to liquidate its assets.

o Additivity → current cash equivalent of assets is determined on the assumption of a gradual

and orderly liquidation.

o The valuation of liabilities → Bonds payable should be stated at face value, rather than
market value. There’s inconsistency of treatment, because bonds as an asset are to be stated
at market value.

o Current cost or exit price → Current cost theorist argue that an entry price is the ‘normal’
method of valuation for the following reasons:
 Using exit prices leads to anomalous revaluations on acquisition because immediately
after purchase value usually falls so that it is less than acquisition cost.
 Using exit prices implies a short-term approach to business operations since one is
interested in disposition and liquidation values. A positive profit under exit price
accounting simply indicates it is worth staying in business over the longer term
 Using exit prices for finished goods inventory leads to the anticipation of operating
profit before the point of sale because the inventory is values in excess of current cost.

LO 6 - Value in Use versus Physical Capital

Value in use approach → emphasises a long-term approach, uses an external investor or a
production-oriented entity as the relevant benchmark and rarely focuses on current liquidation values
but is interested in the prospects for the future cash flows, which are more accurately predicted by
operating earnings rather than current cash flows.

Value in exchange approach → concentrates on a short-term approach, takes the viewpoint of an

internal manager or creditor who has to make decisions related to the liquidity of the firm and current
spending power.

LO 7 - A Global Perspective and IFRS

 Current cost in the United States
o 1976: require that replacement cost data be disclosed in the filed 10-K reports by firms with
inventories and productive assets totaling more than US$100 million and constituting more
than 10% of total assets. (ASR 190)
o 1979: FASB repealed ASR 190, require supplementary disclosures of general inflation
adjusted accounts and current cost data. (Statement 33)
o 1984: after considering the evidence on and reactions to the supplementary data, the FASB
eliminated the requirement to report. (Statement 82)
o 1986: rescinding the requirement but urging companies to continue disclosing the data.
(Statement 89)

 Current cost in the United Kingdom

o 1975: Sandilands Committee recommended a system of current cost accounting and
accepted in substance by the accounting profession as represented by the Accounting
Standards Steering Committee.
o 1976: The Inflation Accounting Steering Group (IASG) was established and produced an
exposure draft (ED 18) that specified guidelines to be used by companies.
o 1980: after much debate, revisions, and experimentation, Accounting Standards Committee
(ASC) issued a statement that the requirements could be satisfied by supplementary current
cost data prominently displayed, or current cost for the main statements and historical cost
as supplementary data. (SSAP 16)
o 1985: ASC withdrew the mandatory status of SSAP 16.

 Current cost in Australia

o 1976: accounting profession issued DPS 1.1, Statement of Provisional Accounting
Standards (PAS) Current Cost Accounting.
o 1978: an amended version of PAS 1 and a working guide were issued.
o 1983: due to criticisms and the lack of any material effect by the provisional standard on
reporting practices, a ‘downgraded’ Statement of Accounting Practice (SAP) 1 Current
Cost Accounting was issued. à ‘strongly’ recommended that all entities present
supplementary current cost accounting statements in addition to their conventional
historical cost financial statements, but it was not a requirement. SAP 1 was not widely
adopted in Australia.

 International accounting standards and current costs

On July 2004, the AASB voted to adopt international accounting standards for all reporting
entities preparing general-purpose financial reports after 1 January 2005. In Europe they were
also adopted for all firms listed on stock markets that applied consolidated accounting. IASB
standards make greater use of fair value measurement than some national GAAP.

Under international accounting standards the definition of fair value can vary substantially from
a cost model to buying and selling prices through to valuation models based on discounted cash
flows or option pricing. There is no mention in the standards of capital maintenance concepts
and hence, no consistent application of income measurement rules based on changes in capital.

 How is historical cost applied?

There is no question that the amount actually paid for an item is more concrete and objective
than an amount that one would have paid. Acquisition costs represent a more ontologically hard
view of reality to a particular firm than market prices. However, remember that the acquisition
cost of an asset in accounting is not simply the invoice price. There are numerous items that may
be included in the cost of the asset (ex: cost of conversion and other costs incurred in bringing
the inventories to the location).

In historical cost accounting the main basis for measuring inventories held at reporting date is
cost. In practice, it is not surprising to find variations in the application of the procedure. The
rule stated by Kieso and Weygandt specifies freight charges as an inventory cost, but in practice
some companies exclude them. It is evident that practice is inconsistent. The question of
capitalising or expensing expenditures also affects the cost of an asset. For some items the
answer is obvious, but for others it is not. Given the nature of research and development
expenditure, it would be appropriate in most cases to expense them immediately if the criterias
are applied.

The Australian Framework, which defines the elements of financial statements (namely assets,
liabilities, equity, income and expenses) and specifies criteria for their recognition in financial
statements, basically adopts a conservative historical cost perspective. However, no guidance is
provided on selecting the appropriate base, again creating inconsistencies in reporting practices.
One of the major accounting issues that arise with respect to non-current assets is not so much
whether they qualify as assets or not, but what is to be included as part of their cost, as reported
in the balance sheet. Furthermore, it is common practice in Australia for businesses to reassess
the value of some or all of their non-current assets. This assessment may lead to a revaluation or
devaluation of selected non-current assets.

‘Recoverable amount of an asset’ is defined in IAS 36/AASB 136 Impairment of Assets. The
notion of ‘recoverable amount’ takes into account the value of the asset from its continued use
and subsequent disposal. An estimate must be made as to the future cash flows of the asset, as
well as its subsequent sale price. Further, it specifies that the discount rate to be used is the ‘pre-
tax rate that reflects current market assessments of (a) time value of money and (b) the risks
specific to the asset for which the future cash flow estimates have not been adjusted’.

Alternative cost method applied to the same set of facts can provide different results (ex: use of
FIFO, LIFO, or Average), although each is historical cost. Subjectivity is involved in the
determination of the acquisition cost of an asset. Yet, for the most part, accountants accept this
and do not appear to be disturbed about it. IAS 16/AASB 116 introduces the option of current
value accounting, which is inconsistent with the provisions of many other accounting standards
and the historical cost model with its underlying principle of objectivity. This is an example of
the mix of approaches being allowed.

 Historical cost under attack

The use of historical costs has not been abandoned but it has some under continual criticism. For
several years, we have witnessed a gradual move away from traditional historical cost reporting.
This move away is probably best reflected in paragraph 101 of the IASB framework, which
recognizes the blending of alternative costing methods and the perceived benefits of current cost
accounting, “the measurement basis most commonly adopted by entities preparing their financial
report is historic cost. This is usually combined with other measurement bases.”

However, IASB recognizes that the issue of the measurement is one of the most underdeveloped
areas of the framework. Both the IASB and FASB frameworks contain lists of measurement
attributes that are used in practice. However, neither provides guidance on how to choose
between different measurement attributes that exist. The business community also does not
appear to share the standard setters’ enthusiasm for mixed measurement models.

 A mixed measurement system and international standards

Although market valuations are implied in the ‘fair value’ approach in some international
financial reporting standards, the approach has been implemented in a crude fashion basically
because accounting regulators do not have a theoretical concept of valuation, capital
maintenance, or income measure. So they have not really adopted a decision-usefulness theory.
Instead, they have adopted their own term—attributes of an asset or liability—instead of distinct
measurement methods. These are some examples of the use of different measurement concepts
in IFRS:
o IAS 2 / AASB 102: Companies are permitted to measure inventory with Net Realizable
o IAS 16 / AASB 16: Property, Plant and Equipment (PPE) is assessed based on historical cost
or value after revaluation
o IAS 17 / AASB 17: Interest from leased land is calculated as Investment Property (IAS 40)
and measured at fair value
o IAS 19 / AASB 19: Curtailment Gain or Loss measurements include changes in the present
value based on a defined benefit obligation for changes in the fair value of assets
o IAS 29 / AASB 29: Adjustments to the financial statements of entities affected by
hyperinflation can use the general price level index
o IAS 36 / AASB 136: Impairment of assets where assets are valued with recoverable amount,
which is the higher of the asset’s value in use and the current cash equivalent.
o IAS 36 / AASB 136: Treats the residual value of an asset as the current cash equivalent,
o IAS 37 / AASB 137: measurement of provisions is determined by the expected present value
o IAS 40 / AASB 140: Property investment can be measured by choice between (a) cost-
depreciation-impairment or (b) fair value with value changes passed through the income
statement as gain or loss.

LO 8 - Issues for Auditors

Auditors seek evidence to support their opinion on whether the financial statements are presented
fairly and in accordance with the relevant standards and laws. Where the auditor believes there is a
greater risk of misstatement, the requirement to gather sufficient and appropriate audit evidence is
more onerous. As discussed, auditor must contend with a mixed measurement model. For any one
entity the measurement bases could include, at a minimum, fair values, discounted cash flows, and
amortized costs.

Each measurement model creates certain types of misstatement risks. Although auditors can reduce
their audit risk by obtaining an expert opinion about a valuation, evidence suggests that such
valuations are not necessarily more reliable than those made by management. Another factor which
increases the risk of misstatement in measurement is the involvement of related parties. The auditor
must seek additional evidence from third parties, inspect all the documents and/or assets, and discuss
the details of the transactions with management and members of the audit committee, as appropriate
in the circumstances.