MATERIALITY THRESHOLDS IN CONTINUOUS AUDITING: RESEARCH AGENDA AND TRAINING MATERIALS

Abstract

Continuous audits are a major trend of last decade and their deployment is projected to shape the market and practices of professionals in the auditing arena (KPMG, 2010; Deloitte 2010). The trend toward deploying more frequent (continuous) audits motivates the study of the assessment of materiality thresholds in these audits. The objective of the current study is twofold: first, to propose a research framework to investigate the most important elements that’ll shape the future of the market for continuous assurance. Then second, to introduce a training manual that could be used either in the classroom or in small to mid-size public accounting firms involved in implementing continuous assurance products. Some of the most significant research questions the current study poses is whether auditors and investors use the same basis to compute materiality thresholds (net income, total assets, or pre-tax income) when continuous reports based on continuous audits are prepared/used to make investment decisions, or whether they determine their materiality estimates on different bases. The study also examines whether the basis to compute materiality thresholds (traditionally net income) used by investors/users and auditors is the annual or the period (month, week, day, etc.) of the report net income. Additionally, the research framework examines the controversy surrounding the congruency between auditors and users materiality estimates. Specifically, the study poses the question of the extent to which materiality threshold estimates of auditors and investors with respect to continuous reports generated by continuous audits will be congruent. Lastly, the study investigates whether the basis to compute materiality thresholds is a function of the subject matter being audited, and whether the congruency between investors and auditor’s materiality estimates is a function of the subject matter being audited. Training materials are developed to reflect the most significant research issues examined in this study.