Question

Question 3 from chapter 10: "Should the results of audit studies and laboratory experiments be more or less trusted than the results of regression studies? Explain."

Answer 1

The audit analysis looks into the accountability of the financial transactions of a firm or a company or in the macro aspect, if it is the case of government budget then the audit analysis is a very important tool for the government to display its transparency in the ‘running of the ‘country and in disbursing the funds collected from the public.

In any case , the audit analysis gives a complete report of the financial statements made and brings greater clarity and meaning to the transactions .The analysis is reliable since it provides proof of its findings—exposing areas of discrepancy and analysing the possible reasons for financial mismanagement , if any.

The analysis can lead to a detailed discussion of any problems / discrepancies detected, department wherein the error lies, causes and consequences of such errors and their impact on other stake holders concerned. It is also important to thoroughly read the audit analysis results and prepare an action plan based on the findings.

While audit findings are analysis (on the actions of human behaviour) and seek to prove the pattern of financial management--the experiments conducted in the laboratories across the world are basically performed both on human and non-human beings like animals, plants and so on. The results are accurate and the inferences are scientifically proven. There is very little scope for arbitrariness and the presence of greater clarity. Hence the laboratory findings are more trusted. However , it has to be noted that in the field of study of economic research , the role of laboratory experiments is very little and studies cannot be as accurately proven as scientific experiments since the object of study is man—or more precisely , human being who is a very volatile and changes his behaviour rapidly as compared to other living beings.

Regression analysis has the advantage of conducting and analysing the study or behaviour of more than one variable. For example, we can take two variables, A and B. These may be dependent on each other or independent of each other yet may be related in some way or the other such that changes in one variable leads to changes in the other. However , the analysis is generally based on certain given situations or assumptions which may not be possible practically or may be too perfect to be applied to reality. This could lead to an analysis which may be far from reality.