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    Materiality Guidance of the Major Public Accounting Firms
    research summary posted July 19, 2015 by Jennifer M Mueller-Phillips, last edited July 19, 2015, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments 
    Materiality Guidance of the Major Public Accounting Firms
    Practical Implications:

    Knowledge of how materiality guidance is integrated into a firm’s methodology is important for accounting and auditing researchers as well as for practitioners, regulators, and educators. The last published research that examined the major firms’ policies on materiality occurred in 1998.The results of this study provide important insights into implementation of materiality standards and valuable information for future research and education.

    For more information on this study, please contact Aasmund Eilifsen,


    Eilifsen, A., and W. F. Messier Jr. 2015. Materiality Guidance of the Major Public Accounting Firms. AUDITING: A Journal of Practice & Theory 34 (2):3-26.

    Materiality, tolerable misstatement, misstatements, group audits
    Purpose of the Study:

    Materiality is a key concept for both auditors and managers, as well as for users of financial statements. Audit standard setters have recently issued standards related to materiality. Firms translate such auditing standards into their methodologies. This paper provides evidence on the relative consistency of the materiality guidance among the top eight firms. More specifically, it shows how firms determine multiple levels of quantitative materiality, the firms’ guidance on the incorporation of qualitative factors in determining and evaluating materiality, their guidance on handling detected and undetected misstatements and, finally, how the firms’ guidance determines materiality levels in group audits. The authors aim to provide possible answers to concerns raised by prior researchers and information helpful in designing future research.

    Design/Method/ Approach:

    The materiality guidance for profit-oriented entities of eight of the largest U.S. public accounting firms was analyzed along six dimensions:

    • Benchmarks for determining overall materiality
    • Percentages applied to benchmarks for determining overall materiality
    • Determination of tolerable misstatement
    • Amounts used to determine "clearly trivial" misstatements
    • Use of materiality to evaluate misstatements
    • Use of materiality on group audits.

    Each firm reviewed the coding of its guidance for accuracy and completeness. The firms’ guidance was provided to the researchers through a partner contact who held a senior position in each firm’s assurance/audit group. Firm contacts were sent a research proposal that provided the motivation for the study, the research questions, and the deliverables. The proposals were sent out in Fall 2011 with approval and completion in Spring 2012; coding and firm review occurred in Summer and Fall 2012. At the time of the study, these were the eight firms subject to annual inspections by the PCAOB.

    Overall, the findings indicated relative consistency of the materiality guidance among the eight firms. Specifically:
    • Quantitative benchmarks (e.g., income before taxes, total assets or revenues, and total equity) used to determine overall materiality and the related percentages applied to those benchmarks are reasonably consistent across the eight firms.
    • Seven firms use a percentage of overall materiality for determining tolerable misstatement that fits in a 50 to 75 percent range; one firm uses a range of 70 to 90percent.
    • Seven of the firms establish a clearly trivial misstatement to be 3 to 5 percent of overall materiality; one firm uses a range of 5 to 8 percent.
    • All of the firms provide detailed guidance on the evaluation of detected misstatements including consideration of qualitative factors.
    • Applying materiality on group audits closely parallels the guidance provided in the standards.
    • There are differences in how the firms consider the possibility of undetected misstatements when evaluating uncorrected detected misstatements.
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Assessing Risk of Material Misstatement, Audit Scope & Materiality Judgements