Consensus of Auditors' Materiality Judgments of Internal Accounting Control Weaknesses

Abstract

This paper reports the results of a field study of the consensus of auditors' assessments of the materiality of internal accounting control weaknesses (IACWs). Results from my experiment suggest moderate consensus among subjects overall and subgroups (e.g., between firms), a varying amount of consensus across different IACWs, and a potential need for more structured criteria in this materiality decision. Recent authoritative pronouncements have increased the importance of evaluations of internal accounting control (IAC) by auditors and, especially, the importance of IACWs. Auditors typically review IAC systems and perform compliance tests to the extent that they plan to rely on such controls in their audit of financial statements. Recent AICPA pronouncements (SAS Nos. 20 and 30) have extended the purpose of the IAC review to include consideration of material IACWs. Specifically, SAS No. 20 requires that the auditor consider material IACWs and communicate these IACWs (and their effects) to the client's board of directors, and SAS No. 30 requires the auditor to disclose material IACWs if an opinion concerning the adequacy of IAC is rendered by the auditor. Future amendments to the current Foreign Corrupt Practices Act of 1977 (FCPA) could also add to the importance of formal IACW assessments by auditors. Amendments have been proposed to the FCPA which