An analysis of the relationship between accounting restatements and quantitative benchmarks of audit planning materiality

Abstract

Purpose

The purpose of this paper is to investigate the relationship between the amounts obtained using professionally accepted quantitative benchmarks of audit planning materiality and the size of accounting misstatements corrected by financial statements restatements.

Design/methodology/approach

The paper uses a sample of 136 companies (237 company years) that have restated such financial statements and compare the amounts of the restatements with planning materiality benchmarks (rules of thumb) established to aid auditors in arriving at audit planning levels.

Findings

It was found that, depending on the method of analysis selected and the materiality benchmark followed, as high as approximately 62 per cent of the restatements involve income levels less than the planning materiality level.

Research limitations/implications

The results lead to questions as to the appropriate relationship between the scope of audit procedures, which is in part determined by these quantitative materiality benchmarks, and subsequent financial statement restatements.

Originality/value

The issue addressed in this study is important because if audit planning levels for materiality are in excess of the amounts subsequently restated due to accounting misstatements, this might serve as an explanation for a number of recent restatements. Furthermore, it might suggest the need to consider decreasing acceptable materiality planning levels, thus resulting in a recalibration of the audit process.

Citation

Chen, H., Pany, K. and Zhang, J. (2008), "An analysis of the relationship between accounting restatements and quantitative benchmarks of audit planning materiality", Review of Accounting and Finance, Vol. 7 No. 3, pp. 236-251. https://doi.org/10.1108/14757700810898230