Material Judgments in Materiality Determination

• In Event: Audit Planning Issues

Abstract

There is limited archival research on the determination of materiality in the audit of financial statements. In this study, we examine the drivers of setting planning materiality and tolerable error. Our findings are based on proprietary data derived from audit files over the years 2005-2015. We use the accountability theory as explaining theory for the materiality determination, in which the accountable person, the accountability source and the communication between those are operationalized. We find significant differences in materiality setting between audit firms, where the Big4 audit firms apply the highest levels of materiality. Furthermore, the clients’ and users’ interests as accountability sources seem to be contradictory in influencing the materiality setting. It turns out that the client relationship and economic bonding affects the level of materiality. Overall, our findings highlight the different factors in materiality assessment between firms and urges a better understanding in this important topic.

Authors

• Wilbert Snoei, Nyenrode Business Universiteit

• Joost Van Buuren, Nyenrode Business Universiteit

• Barbara Majoor, Nyenrode Business University