Search results

The absence of clear guidelines as to how materiality should be judged has created problems for accountants and auditors, and resulted in risks to users of financial statements. Results of past research indicate a great lack of consensus within a judgement group (e.g. auditors) and a large degree of diversity between groups (e.g. auditors v. statement preparers), with respect to the appropriate materiality threshold. Based on past research concludes that industry, an important contextual variable in materiality judgements, may be responsible for the inconsistencies in judgements in the past. The close relationship between materiality and audit risk suggests that the type of industry may have a similar impact on risk assessments. Proposes that industry effects on materiality judgements and risk assessments be further investigated. Also suggests the need for industry‐specific guidelines for materiality and audit risk.

Audits of long‐term insurers are complex, high‐risk engagements. The auditor’s consideration of materiality has a direct impact on the quality of such audits. So far, however, no research has been published on the application of materiality in audits of long‐term insurers. This study examines various aspects of planning materiality in the audits of listed South African long‐term insurers on the basis of responses to a questionnaire, taking into account issues identified from the literature reviewed. A number of recommendations are made on the basis of the findings. Largely on the basis of the results of this study, the South African Institute of Chartered Accountants has commissioned a project to revise existing guidance for auditors.

This paper seeks to focus on the issue of materiality judgements and the need for public disclosure of materiality levels. Insights about the concept of materiality are drawn from the words of users of audited financial reports, auditee managements, suppliers to the market for audit services and auditing standard setters and regulators.

This paper reports findings arising from face‐to‐face office interviews with individuals representing identified groups of stakeholders in the market for audit services about the issue of “materiality” as this concept is applied in auditing. The interviews canvassed many issues related to audit as part of a larger project entitled “The future of audit”.

In general, stakeholders perceive that the concepts involved in audit materiality are not well understood and they point to the difficulty in providing educative materiality about it, especially in relation to qualitative materiality, to retail investors in particular. There are mixed views as to whether the actual level of tolerable error, as per one of the meanings of materiality in the audit space, should be disclosed, with some feeling that it might be detrimental or dangerous.

If incremental information about materiality is to be disclosed, the issue of where, what to whom, by whom and when arise. Various suggestions are made by stakeholders in respect of these questions.

The paper concludes by drawing from the insights gained by the authors through the comments of participant stakeholders to make recommendations that deal with the issue of audit materiality.

The purpose of this paper is to investigate the effect of qualitative materiality factors on auditors’ assessment of materiality and the determination of the type of the auditors’ reports. This paper also analyzes whether differences in personal characteristics of auditors can influence their use of qualitative materiality factors in assessing material misstatements.

A questionnaire and experimental case studies were undertaken to determine whether differences in personal characteristics of auditors can influence their degree of reliance on qualitative factors in assessing the materiality of detected misstatements. Descriptive and statistical tests were used to analyze the data collected.

The results of this paper show that qualitative materiality factors strongly influence the auditor’s materiality judgments. However, no significant differences were found regarding the effects of auditors’ personal characteristics on the degree to which they rely on the qualitative factors in their materiality judgments. Also, in certain situations, auditors considered factors other than the income for assessing certain misstatements as material and consequently modified their audit reports.

This paper examines the influence of qualitative factors on auditors’ materiality judgments and develops a list of qualitative factors to be considered by auditors when assessing materiality. It also concludes that the nature of misstatement is the least important qualitative factor considered by auditors when assessing materiality of detected misstatements and that the existence of more explicit or standardized qualitative materiality guidelines would lead to a more uniform judgment among auditors.

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.

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.

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.

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.

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.

Part IV provides readers with the extant requirements for the application of materiality to recognition, measurement, presentation, and disclosure in the financial statements. This part also includes a detailed critical review of the recent Practice Statement on materiality, the FASB’s proposed ASU on the notes and the amendments to the Conceptual Framework proposed by the IASB and the FASB.

The part expands to issues that are typical of Management Commentary, including the SEC guidance on materiality in Management Discussion and Analysis.

It informs about the complexities and subtle differences between financial statements and bookkeeping and the different standards of reasonableness versus materiality.

A section moves from materiality to material misstatements and covers the application of materiality in auditing.

Another section goes in depth on internal control over financial reporting, showing the linkages between materiality and risk appetite and risk tolerance and the related application guidance.

Materiality is an ill‐defined yet important concept in auditing. However, lack of an auditing guideline exposes auditors to possible litigations due to failure to detect material misstatement in the financial statements. This paper assesses decisions by UK courts on materiality thresholds. The results from 28 selected cases failed to reveal any consistency in the adoption of materiality thresholds. A guideline is urgently needed by the Auditing Practices Board to increase consistency in decisions on material transactions/events.

Researchers and practitioners have long debated the arguments in favor of and against providing specific mathematical materiality guidelines in auditing standards. Yet, there is little empirical evidence about the relationship between materiality thresholds and audit risk judgments in the absence of such guidelines. In this study, 152 Big Six managers evaluated materiality and risk for an audit simulation based on an actual case where material fraud was undetected. The auditor subjects were allowed to choose the evidence they would examine before reaching a decision. The major findings of the study are that while auditor materiality judgments differ, these differences were not statistically significantly related to either fraud risk judgments or the amount of evidence the auditors chose to examine before rendering their judgments. This empirical evidence does not support the need for specific quantitative guidance in accounting standards related to materiality. However, other considerations (such as concern for legal liability) could also have an impact on the advisability of providing specific quantitative guidance for setting materiality thresholds.

Auditors should realize misstatements and communicate to managers for adjustments. Managers usually modify the misstatements, but they have motivations, like earnings management, for not altering the misstatements. The auditor expects to identify the misstatements’ earnings management, inform the managers and reduce earnings management by proposing adjustments. This study aims to determine whether identified and adjusted misstatements cause a decline in earnings management. Is the increase in the materiality of identified and adjusted misstatements associated with a reduction in earnings management?

The identified and adjusted misstatements are obtained from the difference between nonaudited financial statements and audited ones. Earnings management is computed using the adjusted Jones model, and the quantitative materiality threshold has also been calculated based on the Iranian auditors’ guidelines. These variables and other required information were gathered for 159 listed firms on the Tehran Stock Exchange during 2014–2019 and examined by the regression models.

The results show a negative relationship between identified and modified misstatements of total assets and earnings management and a positive and significant relationship between identified and adjusted misstatements of total liabilities and earnings management. However, the positive relationship between identified and adjusted misstatements of net income with earnings management is not significant. Besides, the relationship between the materiality difference and an absolute value of identified and adjusted misstatements (materiality minus the absolute value of misstatements) of total assets and earnings management is positive and significant, but the negative association between materiality difference and the absolute value of identified and adjusted misstatements of total assets and earnings management is not significant. The relationship between materiality difference and the absolute value of identified and adjusted net income and earnings management misstatements is negative and significant. These results indicate that the more material the identified and adjusted misstatements, the less earnings management.

The difference between nonaudited and audited financial statements represents identified and adjusted misstatements (audit adjustments). The client probably made some adjustments, but separating these adjustments from the auditor’s identified items was impossible with the available data.

The results show that significant audit adjustments decline earnings management. Paying more attention to a high-quality audit performed by the audit firms, auditors, managers and users and, consequently, discovering misstatements and adjusting or reporting them would decline the earnings management’s unfavorable impacts.

The unfavorable consequences of earnings management can cause the inappropriate transfer of wealth in the capital market and some investors’ loss to others’ benefit. These consequences can cause a loss of trust and leave unfavorable psychological effects on the capital market and society. Identifying and adjusting significant misstatements can lead to the decline of such impacts.

The previous studies assessed the relationship between identified and adjusted misstatements (audit adjustments) and earnings quality or earnings management. However, this study focuses on audit adjustments’ materiality to assess the impact of significant adjustments on earnings management.

There are many definitions of materiality and such differences in definition show that there is great concern about the applicability of materiality in the auditing profession. Various materiality guidelines have been recommended by both academic researchers and accounting bodies, but the Auditing Practices Board in the UK has yet to recommend a guideline of its own. Looks at the recommendations put forward by those researchers and accounting bodies and the implications and possible pros and cons of having structured guidelines by the auditing profession in the UK. Concludes with a recommended materiality guideline which the Auditing Practices Board should seriously consider and the possibility of applying computer‐based decision aids as a tool to improve efficiency and effectiveness of decision making by the auditors.