Judgment and Decision Making. Definitions Judgment definition: Judgment serves as the basis for decisions Decision definition:

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Presentation transcript:

Judgment and Decision Making

Definitions Judgment definition: Judgment serves as the basis for decisions Decision definition:

Judgment and Decisions Think of examples of accounting and auditing decisions that require judgment Describe the decision Describe the judgments that inform the decision

Financial Reporting Example Company #1 Financial reporting judgment and decisions involved:

What Could Possibly Go Wrong? What explanations are possible when financial statements are misstated and auditor opinions are wrong? Decision bias: Decisions are deliberately inconsistent with judgments (conscious) Judgment bias: Decisions are made based on biased judgments (unconscious)

Classroom Exercise Because we were not able to count the items in the container, we were unable to gain direct personal knowledge of the exact number. So, we had to use judgment to estimate. Why did our judgments differ from the actual number? How can we know if we were biased?

Decision Bias in Accounting and Auditing Why might decisions be biased?