Discussion of a Judgment-Based Definition of Materiality

Abstract

Moriarity and Barron illustrate the use of conjoint analysis to describe the extent to which each of five financial variables was considered important by five auditors in making materiality judgments. Additive models were fitted to subjects' responses to derive the values of the partworth function over four levels of each variable for each auditor. These values were then analyzed to assess the importance of each variable for each auditor in making the materiality judgments. The authors conclude that the analysis produced interpretable values for the part-worth function for each auditor, provided acceptable predictions of judgments not used to fit the particular model, but revealed a lack of consensus across auditors for both the values for the part-worth functions and the predictions. In discussing their illustration, I focus on three major issues. The first is the process of identifying or selecting the attributes or variables which are likely to be relevant to auditors in making materiality judgments. The second is the process of implementing conjoint analysis to estimate the structure of these judgments. The third is the extent to which the approach illustrated provides insights about how various factors or variables affect materiality judgments and why highly trained professionals with extensive experience often reach different conclusions in similar situations.