How Do Investor and Auditor Materiality Judgments Compare?

Abstract

SUMMARY Materiality remains a challenging concept for auditors to implement in practice. The challenges underlying auditor materiality assessments are compounded by the fact that materiality is typically defined from the investor’s (rather than the auditor’s) perspective. Despite this investor orientation, there is little empirical evidence about investors’ materiality judgments, specific quantitative and qualitative factors underlying their judgments, and how their judgments compare to auditors who implement materiality in practice. This article summarizes a recent study by DeZoort, Holt, and Stanley (2019) that addresses this problem by modeling sophisticated and unsophisticated investors’ materiality judgments in a policy-capturing study, using experienced auditors as a benchmark. Results indicate significant differences in materiality judgments, judgment consensus, and cue utilization among the three participant groups. Findings also reveal between-group differences in self-reported quantitative materiality thresholds, judgment self-insight, as well as judgment confidence. We conclude the article with a discussion of the practical implications surrounding these findings.