GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 5
MEASUREMENT THEORY
Teori Pengukuran
Campbell:
The assignment of numerals to represent properties of material
systems other than numbers

Penugasan angka untuk mewakili sifat dari sistem bahkan selain

angka dalam kebajikan dari hukum yang mengatur sifat ini

Assignment
Assignment of of numerals
numerals to to objects
objects or
or events
events
according
according to
to rules.
rules.(Stevens)
(Stevens)
Pelekatan suatu angka kepada objek atau
peristiwa menurut aturan tertentu
 Importance of measurement
Involveslinking the formal number system to some property of
objects or events by means of semantic rules
e.g. semantic rules in accounting are represented by transactions
In accounting we measure profit by:
first assigning a value to capital
then calculating profit as the change in capital over the period

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 Scales
Every measurement is made on a scale
Created
when a semantic rule is used to relate the mathematical
statement to objects or events
The scale shows what information the numbers represent
Setiap pengukuran dibuat berdasarkan sebuah skala
Sebuah skala dibuat ketika aturan semantic digunakan untuk
menguhubungkan pernyataan matematika kepada objek atau
kejadian
Skala menunjukkan informasi apa yang diwakili oleh angka

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 Nominal scale
In this scale, numbers used only as labels
Numbers represent classification
e.g. numbering footballers
e.g. the classification of assets and liabilities into different classes

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 Ordinal scale
In this scale, rank orders objects with respect to a given property
e.g. tallest to shortest person
e.g. investment alternatives that are ranked 1, 2, 3 according to the
size of their net present values
Intervals between the numbers are not necessarily equal

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 Interval scale
In this scale, rank orders objects with respect to a given property
The distance between each interval is equal and known
An arbitrarily selected zero point exists on the scale
e.g. celsius temperature scale
e.g. standard cost accounting

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 Ratio scale
In this scale, rank orders objects with respect to a given property
Intervals between objects are known and equal
A unique origin exists
e.g. measurement of length
e.g. use of dollars to measure assets and liabilities

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 Permissible operations of scales
Invarianceof a scale means that the measurement system will
provide the same general form of the variables, and the decision
maker will make the same decisions
This
is not the case in accounting there is more than one
accounting system
Theinformation they provide will differ and different decisions will
be made

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 Permissible operations of scales
Nominal and ordinal scales
no arithmetic operations
Interval scale
addition and subtraction
Ratio scale
all arithmetic operations

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 Types of measurement
There
must be a rule to assign numbers before there can be
measurement
The formulation of the rules gives rise to a scale
Measurement can be made only on a scale

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 Fundamental measurements
Numbers are assigned by reference to natural laws
Fundamental properties are additive
e.g. length, number and volume

In
accounting there is considerable debate over the nature of
fundamental value

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 Derived measurements
Is
one that depends on the measurement of two or more other
quantities
Depends on known relationships to fundamental properties
e.g. the measurement of density depends on the measurement of both
mass and volume
e.g. the measurement of profit depends on the measurement of both
income and expenses

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 Fiat measurements
Typical in social sciences including accounting
Based on arbitrary definitions - e.g. of profit
Numerous ways in which scales can be constructed
Maylead to poor levels of confidence in the scale e.g. there are
hundreds of ways to measure profit

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 Reliability and accuracy
No measurement is free of error except counting
e.g. we can count the chairs in a room and be exactly correct

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 Sources of error
The sources of error include the following:
Measurement operations stated imprecisely
Measurer

Instrument

Environment

Attribute unclear
Risk and uncertainty
We need to establish limits of acceptable error

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 Reliable measurement
What is reliable measurement?
proven consistency
repeatable or reproducible
precision

Reliability incorporates two aspects

accuracy and certainty of measurement
representative faithfulness

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 Accurate measurement
Consistency of results, precision and reliability do not necessarily
lead to accuracy
Accuracy has to do with how close the measurement is to the true
value of the attribute measure - representation
True value may not be known
e.g. in accounting accuracy relates to the pragmatic notion of
usefulness

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 Accurate measurement
Many accounting measurements are on a ratio scale
This is the most informative scale
Weakest theoretical foundation as they are fiat measurements

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 Measurement in accounting
Two fundamental measures
capital & profit
Capital and profit can be defined & derived in various ways
Concepts of capital & profit have changed over time
number of concepts of fundamental measurement

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 Measurement in accounting
Two notable developments in international standards (2005, IASB)
profit measurement and revenue recognition should be linked to timely
recognition
the fair value approach should be adopted as the working
measurement principle

At no stage has the principle of capital maintenance been explicitly

discussed

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 Measurement issues for
auditors
Thefocus of profit measurement has shifted from matching
revenues and expenses to assessing the changes in the fair value
of net assets
e.g. immediate recognition of impairment losses

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 Measurement issues for
auditors
Auditors
must determine whether management has made
appropriate and reasonable valuations
e.g. at least 12 methods of valuing intangibles

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 Measurement issues for
auditors
It
is possible for several different but reasonable measurements
and impairment losses to be recognised by management
These would all be acceptable to an auditor if management have
applied the valuation models correctly
used appropriate data
made appropriate assumptions
acted in a consistent manner

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 Summary
Measurement involves the formal linking of numbers to some property or
event via semantic rules
Rules used to assign numbers are determined according to four scales
Invariance of a scale means the measurement system will provide the
same general form of the variables and the decision maker will make the
same decisions
There are three different types of measurement
Reliability refers to consistency, and accuracy refers to the representation
of a fundamental value
The two fundamental measures in accounting are capital and profit and
they are both derived measures
The existence of alternative valuation methods creates auditing issues
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 Key terms and concepts
Measurement
Nominal scale
Ordinal scale
Interval scale
Ratio scale
Invariance of a scale
Fundamental measurements
Derived measurements
Fiat measurements
Reliability in measurement
Accuracy in measurement
Capital and profit as derived measurements
Appropriate measurement in an auditing context

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