Abstract
The concept of materiality permeates the audit process and is often used to describe the scope of the auditor’s responsibility to the public. Good materiality judgements are crucial for the conduct of an efficient and qualitative audit. Despite the importance of materiality, little is known about how auditors assess materiality. Professional bodies and regulatory authorities remain cautious in publishing rules of thumb or guidelines on the calculation of materiality. The determination of materiality is to a large extent left to the professional judgment of the auditor. Recent research indicates that audit outcomes can be influenced by individual auditor characteristics. In this paper, we examine whether the sex and the socio-cultural background of auditors affect their materiality judgements to be either conservative or aggressive. We analyze the final written ability exam of 160 future Belgian auditors including an evaluation materiality task. Belgium is historically divided into two regions: the Dutch-speaking region in the North (Flanders) and the French-speaking region in the south (Wallonia). The results indicate that female auditors as well as auditors with a French-speaking affiliation are, ceteris paribus, more likely to set lower materiality thresholds. Implications for the audit profession are discussed.
Highlights
IntroductionStatement on Auditing (ISA) 320 (International Assurance & Auditing Standards Board (IAASB), 2009) states that the auditor should apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of individual misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report
The concept of materiality permeates the audit process
To identify the level of conservatism in materiality judgements we calculate the Relative Median Deviation (RMD) which tells us how much the materiality level calculated by each trainee (i) within exam session (x) differs from the median materiality level observed in exam session (x)
Summary
Statement on Auditing (ISA) 320 (International Assurance & Auditing Standards Board (IAASB), 2009) states that the auditor should apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of individual misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report. If materiality is too high, the auditor might not collect enough evidence and certain abnormalities might not be detected, increasing the risk of expressing an unqualified opinion where a modification is reasonably justified (false positive). Any error of whatever small size needs to be found, the auditor would engage in extensive audit procedures that are no longer justified from a cost-benefit perspective (reasonable assurance), increasing the risk of qualifying financial statements that still give a true and fair view (false negative)
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