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1 – 10 of over 1000Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes the…
Abstract
Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes the selection of quantitative threshold, to expand to the choice of benchmarks. It contrasts the whole financial statements with subaggregates, line items, and components.
Specific sections contrast IASB, FASB, SEC, and other guidance on materiality applied to comparative information, interim reporting, and segment reporting.
The section on estimates mingles complex guidance coming from accounting, auditing, and internal control over financial reporting to explain how the management can improve its assessment of materiality concerning estimates.
After explaining the techniques to move from individual to cumulative misstatements, the part tackles verification ex post, and finally summarizes the intricacies of whether immaterial misstatements are permissible and their consequences.
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Abdollah Azad, Mahdi Salehi and Mahmoud Lari Dashtbayaz
Auditors should realize misstatements and communicate to managers for adjustments. Managers usually modify the misstatements, but they have motivations, like earnings management…
Abstract
Purpose
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?
Design/methodology/approach
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.
Findings
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.
Research limitations/implications
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.
Practical implications
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.
Social implications
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.
Originality/value
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.
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Mojtaba Safipour Afshar, Omid Pourheidari, Bakr Al-Gamrh and Asghar Afshar Jahanshahi
The purpose of this paper is to study whether diverting auditors to erroneous accounts leads to higher effectiveness and detection of errors. Also, this paper investigates the…
Abstract
Purpose
The purpose of this paper is to study whether diverting auditors to erroneous accounts leads to higher effectiveness and detection of errors. Also, this paper investigates the effect of the need for cognitive closure of auditors on audit effectiveness and detection of errors in the presence of audit management.
Design/methodology/approach
The authors used a financial statement containing a diverting statement and several errors for measuring audit management and used a survey to measure auditors’ need for closure. Research sample consisted of 79 independent auditors having above three years of audit experience. The set of financial statement and questionnaire (measuring the need for closure of auditors) was given to auditors and they had enough time to fill them.
Findings
Results show that diverting auditors to accounts containing error does not lead to higher effectiveness and detection of errors. Also, auditors need for closure character does not affect their effectiveness and detection of errors in the financial statements.
Practical implications
Diverting auditors to erroneous accounts leads to higher detection of earning management. With this regard, the results increase the awareness of auditors that diverting auditors away from important errors to easy-to-detect erroneous accounts leads to their belief of achieving the audit objectives by detecting phony errors and misstatements. In other words, the results alert auditors of managers’ techniques of audit management.
Originality/value
This study contributes to the literature on audit management and need for cognitive closure of auditors in Iran’s audit environment and introduces these concepts to this environment. The paper will be of value to Association of Iranian Certified Public accountants to include stricter measure in appraisal of audit firms’ quality and educate its participants about audit management and mediating effect of the need for closure of auditors on the detection of errors and misstatements in financial statements.
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Hanmei Chen, Kurt Pany and Jian Zhang
The purpose of this paper is to investigate the relationship between the amounts obtained using professionally accepted quantitative benchmarks of audit planning materiality and…
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.
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Totok Budisantoso and Heni Kurniawan
The main objective on this research is providing evidence of the contagion effect of decreasing audit's quality. Audit failure affects the quality of the financial analysis that…
Abstract
Purpose
The main objective on this research is providing evidence of the contagion effect of decreasing audit's quality. Audit failure affects the quality of the financial analysis that has been carried out and has a big impact on the accuracy of decision making due to the material information bias. Findings of this research will urge the Public Accounting Firm (PAF) to design a quality control of the audit services. This action is taken with the consideration of maintaining the quality of audit services and the reputation of auditors.
Design/methodology/approach
Utilizing manufacturing data listed on Bursa Efek Indonesia (BEI), the researchers developed a model to explain the audit failure which is seen from restatement of financial statement in the subsequent period.
Findings
This research indicates that audit failure to detect the misstatement will decrease the audit's quality of other companies audited by the same auditor. There is also an insight that contagion effect of decreasing auditor quality was stronger for non-big four and non-industry specialist auditors.
Research limitations/implications
Audit failure still has the potential to occur. There is the potential that a failure in an audit of a particular client entity has an impact on defects of other clients served. If this allegation is proven, there are big challenges faced by the public accounting profession and PAF to pay special attention in order to maintain the professional reputation.
Practical implications
Professional body and government need to develop a robust standard and operating procedures as well as quality control on audit engagement.
Originality/value
Due to the intention of fraud occurred in Indonesia, namely SNP Finance and Garuda Indonesia case. It is important to learn from that cases. This research gives fruitful insights to prevent the same case in the future.
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This paper examines the role of professional associations, governmental agencies, and international accounting and auditing bodies in promulgating standards to deter and detect…
Abstract
This paper examines the role of professional associations, governmental agencies, and international accounting and auditing bodies in promulgating standards to deter and detect fraud, domestically and abroad. Specifically, it focuses on the role played by the US Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), the Institute of Management Accountants (IMA), the Association of Certified Fraud Examiners (ACFE), the US Government Accounting Office (GAO), and other national and foreign professional associations, in promulgating auditing standards and procedures to prevent fraud in financial statements and other white‐collar crimes. It also examines several fraud cases and the impact of management and employee fraud on the various business sectors such as insurance, banking, health care, and manufacturing, as well as the role of management, the boards of directors, the audit committees, auditors, and fraud examiners and their liability in the fraud prevention and investigation.
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The purpose of this paper is to describe and analyze the accounting standards reforms that have moved the accounting profession away from rules‐based towards principles‐based…
Abstract
Purpose
The purpose of this paper is to describe and analyze the accounting standards reforms that have moved the accounting profession away from rules‐based towards principles‐based accounting practice and financial reporting, and to explore the implications for boards of directors of fair value estimates of the unknowable contaminating financial statements with financial misstatements.
Design/methodology/approach
The paper critically reviews the internationally accepted accounting, auditing and financial reporting standards with respect to fair value accounting and relates them to directors' fiduciary duties – the duties of care, of oversight, and of obedience.
Findings
The search for relevance in financial accounting raises daunting challenges for boards of directors tasked with fairly presenting the financial condition of a reporting business entity.
Research limitations/implications
The accounting profession has long been epistemologically conservative, judging reliability to be more important than relevance in the compiling of financial statements. With the fair value reforms, relevance has achieved ascendency over reliability. This necessitates an increase in the need for more research in the epistemology and ethics of accounting.
Practical implications
Boards of directors need to be well‐informed about, and fully engaged with, the assessment of the level of risk of material misstatement associated with the fair value accounting estimates, and with the adequacy of the related mandatory explanatory disclosures.
Originality/value
This paper's originality is grounded in its exploration of the epistemology of accounting in the light of the adoption of fair value conventions in the internationally accepted accounting, auditing and financial reporting standards and its drawing out of the implications this has for corporate governance.
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Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially those…
Abstract
Both the international and US auditing Standards provide guidance to the auditor in searching for material misstatements caused by errors and fraud. Auditors, especially those with clients interested in cross‐border securities markets, should comprehend the similarities and differences in the requirements found in the Standards in these significant audit areas. A comparison of the international Standard for error and fraud to the two US Standards for these topics discloses numerous similarities and a few differences. The findings are reassuring to auditors serving clients with cross‐border interests. Whether the auditor is utilizing the international or the US guidance, comparable audit work in searching for misstatements arising from errors and fraud is being performed.
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