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An analysis of the auditor's uncertainty about probabilities

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  • S. LARSSON
  • G. R. CHESLEY

Abstract

. Uncertainty or ambiguity about what specific probability to associate with a given event is a problem for auditors and is one that has been shown to influence the decisions of others. While some theories of probability assume this problem away, others have tried to address it in various ways. This paper provides a formal analysis of this question and presents a means of characterizing the ambiguity associated with the probability inference. The measure we present can capture a number of the previously specified approaches to this question while exhibiting some very intuitive conclusions and some well†known mathematical properties. Résumé. L'incertitude ou l'ambiguïté relative à la probabilité spécifique à attribuer à un événement donné, est un problème pour les vérificateurs et un problème qui a été démontré comme influençant les décisions des autres. Alors que certaines théories de probabilité ne tiennent pas compte de ce problème, d'autres ont essayé de s'y intéresser de différentes façons. Cet article fournit une analyse formelle de cette question et présente un moyen de caractériser l'ambiguïté associée avec l'inférence de probabilité. La mesure que nous présentons reprend un certain nombre des approches déjà existantes sur cette question tout en exposant quelques conclusions très intuitives et quelques propriétés mathématiques bien connues.

Suggested Citation

  • S. Larsson & G. R. Chesley, 1986. "An analysis of the auditor's uncertainty about probabilities," Contemporary Accounting Research, John Wiley & Sons, vol. 2(2), pages 259-282, March.
    • Handle: RePEc:wly:coacre:v:2:y:1986:i:2:p:259-282
    DOI: 10.1111/j.1911-3846.1986.tb00618.x
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    References listed on IDEAS

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    1. Einhorn, Hj & Hogarth, Rm, 1981. "Behavioral Decision-Theory - Processes Of Judgment And Choice," Journal of Accounting Research, Wiley Blackwell, vol. 19(1), pages 1-31.
    2. William Fellner, 1961. "Distortion of Subjective Probabilities as a Reaction to Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 670-689.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    5. Peleg, Bezalel, 1970. "Utility Functions for Partially Ordered Topological Spaces," Econometrica, Econometric Society, vol. 38(1), pages 93-96, January.
    6. Heimann, Sr & Chesley, Gr, 1977. "Audit Sample Sizes For Aggregated Statement Accounts," Journal of Accounting Research, Wiley Blackwell, vol. 15(2), pages 193-206.
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    Cited by:

    1. Wally Smieliauskas, 1989. "A note on Bayesian risk models of audit practice," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 720-732, March.

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