The results of the studies documented in this review suggest that there is a great deal of variability in the approaches taken by firms for establishing materiality. Such differences in materiality methods can affect both the effectiveness and efficiency of audits. For example, if firms differ in how they allocate materiality to financial statement accounts, then the scope of the work could differ across audits with similar characteristics. Auditors also appear to differ in terms of the factors they consider for determining the materiality of internal control weaknesses, suggesting that auditors may need more structured criteria to make materiality judgments about internal control weaknesses. Materiality judgments are influenced by authoritative guidance, suggesting that standard setters and audit firms have the ability to influence auditors’ materiality judgments by providing auditors with specific guidance.
Messier, Jr., W.F., N. Martinov-Bennie, and A. Eilifsen. 2005. A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice and Theory 24 (2): 153-187.
Firms should consider the levels of accountability pressure and situations where they use them and consider how different levels of pressure may impact performance. Higher levels of accountability pressure may increase effectiveness and increase the likelihood of finding material misstatements.
On the other hand, increased effectiveness and time spent due to higher levels of accountability pressure may cause inefficiencies and result in unnecessary effort. Firms should evaluate the costs and benefits for their situations.
The authors note that this study only looks at the effect of accountability pressure from an unknown partner. In the real world, auditors have accountability pressures from many levels such as other superiors, clients, regulators, and audit committees.
Further, the auditor may have assessed things differently if they knew the partner that was performing their review.
DeZoort, T., P. Harrison, and M. Taylor. 2006. Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort. Accounting, Organizations, and Society 31 (4-5): 373-390.
The analysis suggests that a holistic synthesis of the independence literature requires one to carefully consider methodological choices underlying a given study. Such an understanding is necessary to appreciate the context and meaning of the reported findings in relation to the greater body of literature and ongoing concerns of regulators.
Church, B. K., Jenkins, J. G., McCracken, S. A., Roush, P. B., & Stanley, J. D. 2015. Auditor Independence in Fact: Research, Regulatory, and Practice Implications Drawn from Experimental and Archival Research. Accounting Horizons 29 (1): 217-238.
The results of this study are important for auditors to consider when making materiality judgments. The evidence indicates that auditors are more likely to overlook the qualitative importance of adjustments that affect a client’s ability to meet or beat analysts’ forecasts. Furthermore, findings suggest that auditors are more lenient with subjective audit differences. The study suggests that providing auditors with guidance on qualitative materiality may improve materiality judgments, but it does not completely alleviate the differences among the earnings benchmarks.
Ng, T.B. 2007. Auditors’ Decisions on Audit Differences that Affect Significant Earnings Thresholds. Auditing: A Journal of Practice and Theory 26 (1): 71-89.
PCAOB Chairman James Doty recently announced plans to convene a task force on audits of fair value measurements, as well as plans to change the auditor’s report to provide more useful, relevant, and timely information to users of public company financial statements. The authors hope their commentary is helpful to standard-setters’ deliberations, and the authors believe it should be useful to auditing scholars, both as a supplemental reading in auditing courses and a source of ideas to help guide future research designs on auditor and user judgment and decision making for high uncertainty FVA estimates.
Bell, T. B., and J. B. Griffin. 2012. Commentary on Auditing High-Uncertainty Fair Value Estimates. Auditing: A Journal of Practice & Theory 31 (1): 147-155.
The potential threat of constrained auditor objectivity due to charismatic leadership is one that has not previously been addressed before. Therefore, auditors should be proactive in making sure they are aware of this threat while working on various audit engagements. Additionally, audit firms should pay attention because it is unlikely that there are any mitigating strategies in place to combat the threat within the firm.
Svanberg, Jan, and P. Ohman. 2017. “Does Charismatic Client Leadership Constrain Auditor Objectivity?”. Behavioral Research in Accounting. 29.1 (2017): 103.
http://commons.aaahq.org/groups/e5075f0eec/summary
Individual auditors have wide variations in the materiality thresholds the auditors use to assess qualitative materiality. Greater clarity in materiality guidance can potentially reduce the variability in auditors’ materiality threshold judgments pertaining to qualitative materiality factors.
Ng, T. B-P and H. T. Tan. 2007. Effects of qualitative factor salience, expressed client concern, and qualitative materiality thresholds on auditors’ audit adjustment decisions. Contemporary Accounting Research 24 (4): 1171-92.
The findings of this study are relevant to financial reporting standard-setters and regulators interested in the effects of financial statement presentation standards on the reliability of the information presented, to auditing standard-setters and regulators who have a responsibility to clarify auditors’ responsibility for misstatement in disaggregated numbers, and to audit firms that must provide guidance to ensure consensus in their auditors’ judgments. Standard-setters should also consider the fact that FASB has also been considering issues related to balance sheet aggregation or netting of balances. As a consequence, the importance of the effects of aggregation on auditors’ materiality judgments may be broader than the focus of the current study.
For more information on this study, please contact Robert Libby.
Libby, R., and T. Brown. 2013. Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement. The Accounting Review 88 (2).
The proposed component materiality method helps the group auditor develop and document a rational plan for achieving the group assurance objective that is rooted in applicable auditing standards and decision theory.
The significant differences in results between the proposed method and the alternatives suggest the need for guidance more definitive than that provided by current auditing standards. Indeed, the authors’ approach could be a useful metric for evaluating the efficacy of methods that do not have as comprehensive a supporting theory.
Field deployment of the proposed method requires software support. A specific implementation is available as an Excel app at http://raw.rutgers.edu/GUAMcalc.
For more information on this study, please contact Trevor Stewart at trsny@verizon.net.
Stewart, Trevor R., and William R. Kinney, Jr. 2013. Group Audits, Group-Level Controls, and Component Materiality: How Much Auditing Is Enough? The Accounting Review 88 (2): 707-737.
The results of this study are important in realizing the investor’s perception of audit quality as it relates to SAB No. 108 disclosures. Investors respond negatively to the quantification of prior period misstatement disclosures. The investor also distinguishes between misstatements that are waived by previous auditors and misstatements waived in the current year. Investors react negatively to misstatements that are disclosed in the current year. The investors also react to the importance of the client as it relates to the misstatements that are waived. Investors understand and react to the correlation between client importance, waived misstatements, and client retention. The results are important to understand that investors react to disclosures made under SAB No. 108.
Omer, T. C., M. K. Shelley, and A. M. Thompson. 2012. Investors' Response to Revelations of Prior Uncorrected Misstatements. AUDITING: A Journal of Practice & Theory 31 (4):167-192.