Audit Partners’ Experiences with Materiality and Detected Misstatements

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 12: Materiality

Abstract

In this paper an experiential questionnaire is used to examine audit partners’ and managers’ experiences with materiality decisions related to detected misstatements. This research builds on the work of Eilifsen and Messier (2015) who studied the materiality guidance of eight international public accounting firms. We obtained responses from 55 partners from 4 international firms in the U.S. and 34 partners from 5 international firms in Norway. Our findings show that (1) the external auditor or the client detected almost all the misstatements, with a majority detected by the auditor; (2) there was a higher incidence of misstatements caused by internal control failure (U.S. sample), inappropriate assumption used in estimate/value (Norwegian sample), and misunderstanding of GAAP/IFRS (both samples); (3) compared to the Norwegian sample, the U.S. sample shows relatively more misstatements caused by internal control failure and misunderstanding of GAAP (IFRS), and fewer misstatements caused by incompetence of client personnel and inappropriate assumption used in estimate/value; (4) the majority of misstatements detected in both samples were factual; (5) there was substantial variability in the benchmarks used for calculating planning materiality both within and across firms; (6) about half of the detected misstatements were booked; (7) most U.S. respondents considered qualitative factors when judging the materiality of the misstatements while this was not the case in the Norwegian sample; and (8) respondents considered the possibility of undetected misstatements in addition to the identified misstatement(s) when evaluating the materiality of misstatement(s).

Authors

• William F Messier, University of Nevada-Las Vegas

• Aasmund Eilifsen, Norwegian School of Economics

• Natalia Kochetova-Kozloski, Saint Mary's University