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    Financial Statement Disaggregation Decisions and Auditors’ T...
    research summary posted April 28, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
    Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement
    Practical Implications:

    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).

    audit guidance; disaggregation; IFRS vs. U.S. GAAP; materiality; statement vs. note disclosure
    Purpose of the Study:

    Current IFRS requires significant disaggregation of income statement numbers while such disaggregation is voluntary and much less common under U.S. GAAP. This study examines whether voluntary disaggregation of income statement numbers increases the reliability of income statement subtotals because auditors permit less misstatement in the disaggregated numbers. Auditors require managers to correct discovered financial statement errors only when they are deemed material, and recent evidence suggests that reporting managers leave many immaterial errors uncorrected. Possible effects of management behavior and required disaggregation resulting from U.S. adoption of IFRS or the recommendations of the joint FASB/IASB financial statement presentation project are also discussed.

    Design/Method/ Approach:

    A total of 78 experienced U.S. auditors from three Big 4 firms participate in the study. Of the 78, 76 identify their current position as audit manager, two identify as audit seniors. Most of the participants’ experience is with public, commercial (nonfinancial), for-profit companies. The participants are randomly assigned to the experimental conditions. The experiment involves the participating auditors determining the materiality of a single audit difference involving the underaccrual of occupancy expenses. 


    Disaggregating expense items can reduce the allowable error in the disaggregated amounts, increasing the reliability of the disaggregated amounts as well as the resulting statement subtotals and totals.
    There is significant disagreement among practicing auditors on the relevance of line items as materiality benchmarks and that reporting disaggregated in the notes reduces the effect. This suggests that voluntary disaggregation decreases the average amount of error tolerated in the current financial statements, but at the same time decreases the consensus in audit practice.
    The prior effect is substantially reduced if the disaggregated data are presented in the notes. This results from conscious differences in beliefs about the relevance of line items as materiality benchmarks.

    Auditor Judgment, Engagement Management
    Audit Scope & Materiality Judgements, Materiality & Scope Decisions