The Investor Perspective and its Influence on Auditor Materiality Judgments

• In Event: Auditor Judgment

Abstract

Regulatory requirements mandate that auditors consider the perspective of reasonable users of the financial statements when determining whether or not a misstatement is material (PCAOB AS No. 11 and ISA No. 320). However, no research to date has investigated whether auditors actually attempt to assume this perspective or, if they do so, how it influences their judgments of materiality. In an application of psychological theory related to perspective taking, we predict and find that auditors spontaneously engage in relatively little investor-minded thinking but also that prompts for them to do so enables them to more readily differentiate between audit adjustments that are relatively more versus less material on qualitative grounds (i.e., How would the adjustment affect industry-specific key performance indicators?). Additionally, we predict and find the perspective taking prompt facilitates the highest degree of differentiation for specialist auditors, as they possess greater industry specific knowledge that they can draw upon to apply information in the case materials. Last, and likely contrary to standard setter expectations, we find no evidence that prompts to actively take the perspective of an investor increases auditors’ propensity to deem a misstatement material.

Authors

• Elizabeth Altiero, University of Illinois at Urbana–Champaign

• Yoon Ju Kang, Lehigh University

• Mark Peecher, University of Illinois at Urbana–Champaign