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This study reports the results of an experiment showing that auditor assessments of litigation risk and planned audit investments are higher when potential errors overstate financial performance than when those errors understate performance. This result is much stronger in the presence of high levels of litigation risk in the client’s industry. These results suggest that in industries where litigation risk is high audited financial statements may contain more unintentional material understatement errors than overstatement errors. Thus, litigation risk—through its effect on auditors—may encourage financial statements that understate firm performance

Machine leaning methods arc currently the object of considerable study by the artificial intelligence community. Research an machine learning carries implications for decision making in that it seeks computational methods that mimic input-output behaviors found in classes of decision-making examples. At the same time, rrsearch in statistics and emnotnetria has d t e d in the development of qualitativeresporrse models chat can be applied to the same kind of problems addnssed by machine-learning models-pticularly those that involve I ) classification decision. This paper presents the theontical structure of a generalized qualitative-response model and compares its performance to two seminal machine-learning models in two problem domains associated with audit decision making. The results suggest that the generalized qualitative--model may be a useful alternative for certain problem domains

Although the cash flow statement has been required in public financial reports since 1988 in the United States (and since 1994 according to International Financial Reporting Standards), these important cash flow data are still often overlooked in standard financial analyses. Accounting net income measures economic performance which does not necessarily match up with the timing of cash flow. Many profitable businesses have been killed by cash flow problems, often in the start-up phase. A business has three types of cash flows: operating, investing, and financing. A key measure of cash flow health is free cash flow, the amount of operating cash flow generated in excess of the cash needed for important spending such as for capital expenditures. Managers must pay particular attention to the difference in timing between when cash is collected from customers from the sale of inventory and when cash must be paid to suppliers for the purchase of that inventory. A significant discrepancy between those numbers indicates a potential cash flow problem. Managers and owners of a business that is burning through cash spend much of their time worrying about cash flow survival and are therefore distracted from making the tactical and strategic decisions important to the long-run success of their business.

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