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“The definition of auditing calls for the communication of the degree of correspondence between assertions and established criteria” [ASOBAC, 1973]. As the profession has rejected adoption of universal quantitative definitions of materiality as infeasible [FASB, 1979], Don Leslie [1984] recommended adoption of a standard requiring disclosure of specific engagement materiality thresholds in the auditor's report. This study examines how such disclosures might affect perceptions of an auditor's culpability and liability in instances where post publication errors are discovered which alternately aggregate to more or less than reported materiality thresholds. A behavioral experiment was conducted in which eighty‐seven U.S. general jurisdiction judges participated. Findings support the potential for meaningful modifications to the standard auditor's report to reduce perceived auditor liability but also note the importance of jurists' pre‐experimental attitudes and beliefs respecting the public accounting profession. In 1985, the Canadian Institute of Chartered Accountants published Materiality: The Concept and its Application to Auditing [CICA, 1985]. In that research study, Don Leslie focused on his perceptions of the communication deficiencies of the standard form audit report used in Canada and the U.S. — the most critical of which he found to be the continuing lack of a quantitative definition of materiality. Leslie's remedy for the problem was novel and controversial even if his recognition of this problem was not without precedent. Leslie did not recommend the prompt adoption of universal, quantitative materiality standards (a proposal which has stalemated progress in the profession for years) but rather adoption of a standard making it compulsory that auditors disclose their individual materiality standards, whatever they may be, on each specific audit, in the audit report. To date, no serious research has examined this proposal since the report's publication, and yet the costs of the communications gap between accounting/auditing professionals and the public seem to be getting greater. The Auditing Standards Board recently readdressed the communications provided by the standard form audit report. One of the clearest observa‐tions to emerge from those deliberations was that there is a lack of reliable research data upon which to base regulatory decisions in this area [Elliott and Jacobson, 1987]. This paper contributes to reduce that vacuum. Specifically, on the following pages we outline the genesis of a research project and the findings of that study in which eighty‐seven (87) U.S. judges evaluated whether and to what degree an altered form of the audit report (including quantitative definition of materiality) would reduce the assessed culpability and legal liability of auditors. The remaining sections of this paper are organized as follows: in section one, we will summarize representative recent relevant literature; in section two, we develop testable hypotheses from that background literature; in section three, we provide a description of the design of our study; in section 4, our findings are reported and in section 5 we discuss implications for practice and future research.

Part II contrasts the views of materiality in the Conceptual Frameworks of the IASB, FASB, IPSAS, and other framework such as the Integrated Reporting. In particular, it analyzes at what level and how differently that concept interacts with the qualitative characteristics of financial information in each of those frameworks. It looks at its pervasiveness and entity specificity, the interlock with the concept of relevance, reliability and faithful representation, completeness, understandability, neutrality, and drills down to the link to recognition.

This part then compares the definitions of materiality in different standards and contexts, to then draw a taxonomy of materiality and its attributes, such as the subject matter, thecontext of assessment, the addressees, the assessor, and the materiality test. A large part of the analysis involves the comparison between legal definitions of materiality and characterizations in the accounting, financial, and larger management contexts.

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.

Materiality is a critical and challenging auditing concept. To help auditors improve their materiality judgments, the authors provide examples from Judaism, primarily due to its longevity and the richness and variety of its stories. The authors show how Judaism interprets and applies materiality in many contexts. For each, the authors provide guidance on how auditors might apply these lessons to improve their materiality judgments. The authors examine five areas where Judaic examples can inform modern auditing including: (1) considering both quantitative and qualitative measures; (2) recognizing that small quantitative changes can lead to material qualitative effects; (3) understanding that ignoring small issues can become a slippery slope; (4) considering the importance of financial statement users’ needs in developing materiality criteria; and (5) prioritizing substance over form. In all examples, context is a critical factor to consider when applying materiality. These results should be of interest to auditors, financial statement users and others.

Part VII highlights certain accounting pronouncements that call for a specific application of materiality to certain financial statement items.

After reviewing the general debate of whether the same concept of materiality should apply evenly to financial statements or it should be standard-, entity-, or topic-specific, it considers the use of a specific unit of account for materiality considerations in revenue recognition, the object of materiality in related-party transactions, and specific items or circumstances that trigger materiality judgments,

The part includes a checklist of accounting pronouncements relating to specific materiality decisions. It also lists where, according to the IASB, each specific standard indicates the need for a specific attention of users to materiality.

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.

The purpose of this paper is to explore the role and implications of storytelling and narrative as a means of making sense of, and giving sense to, the ambiguous concept of materiality.

The use of stories was “discovered” through the authors' attempts to “make sense” of data from 16 interviews with participants from the financial and nonfinancial reporting and assurance contexts. The authors analyse the participants' use of stories through a sensemaking/sensegiving lens.

While participants struggle to define what materiality is, they are able to tell “stories” about materiality in action. The authors find stories are a key vehicle through which participants make sense of and give sense to materiality, for themselves and (an)other. Participants tell three types of stories in sensemaking/sensegiving processes: the lived, the adopted and the hypothetical. The authors further identify “rehearsed” and “ongoing” narratives, which take any of the three story types. The use of stories to make and give sense to materiality reveals a disconnect between the static, technical definitions of materiality currently favoured by standard setters and guidance providers, and the creative authoring processes the participants employ.

The authors argue for a move towards the use of stories and narratives about materiality in standard setting, specifically “materiality in action”, which the findings suggest may assist in creating shared understandings of the ambiguous concept.

While previous research considers what materiality means within financial and nonfinancial reporting and assurance contexts, the authors empirically analyse how people understand and make sense/give sense to materiality. The authors also contribute to the use of sensemaking/sensegiving processes within the accounting literature.

In reviewing contemporary literature on materiality judgement and the audit expectations gap (AEG), this paper considers an apparent void concerning that aspect of the AEG caused by the non‐disclosure of materiality and risk thresholds and criteria in the financial reports. The review enables the formation and discussion of two premises: first, disclosing cornerstone concepts, such as materiality and risk judgements, in financial reports enhances users' understanding of the limitations of information contained therein; and second, expanding the wording in audit reports reduces the AEG and enhances users' understanding of the objectives and limitations of an audit. In supporting the validity of these premises, it is concluded that the disclosure of materiality and risk judgements in financial reports may reduce the AEG. This hypothesis may be useful for future empirical research.

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.

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.