A Review and Integration of Empirical Research on Materiality: Two Decades Later

Abstract

There has been a renewed interest in the concept of materiality motivated by concerns at the Securities and Exchange Commission, the Sarbanes-Oxley Act, and the Auditing Standards Board and International Auditing and Assurance Standards Board issuance of proposed standards on materiality. This paper: (1) reviews and integrates the empirical research on materiality since 1982, and (2) suggests some implications of this research for audit practice and research. The review indicates that while many issues related to materiality have been addressed by prior research, a number of new and important areas are in need of further examination.

What does materiality mean to integrated reporting preparers? An empirical exploration

“…Previous research offers a variety of definitions of the principle of materiality (Brennan and Gray, 2005;Messier et al, 2005), which shift over time (Edgley, 2014) and across various corporate reporting contexts (e.g. financial vs. non-financial) (Eccles and Krzus, 2014).…”

The Influence of Audit Risk and Materiality Guidelines on Auditors’ Planning Materiality Assessment

“…Concerning the results of empirical materiality research, Messier et al (2005) have come to the conclusion that research conducted prior to 1982 does not provide any definite comprehensive implications for audit practice or for policy formulation. Since then, there have been several significant changes in both the regulatory and professional auditing environments.…”

“…Since then, there have been several significant changes in both the regulatory and professional auditing environments. According to Messier et al (2005), renewed interest in materiality arose in the late 1980s, most likely due to the incorporation of the audit risk model into auditing standards and the integration of the model into public accounting firms' audit methodologies.…”

The consideration of environmental matters in the audit of financial reports

“…In that case, auditors would not need the client to make any audit adjustments. This process enables the auditor to determine if the misstatements are material enough to require adjustments to the client's books (Messier Jr. et al, 2005). However McKee and Elifsen (2000) raised a concern that the audit standard on materiality does not give guidance on how to implement materiality concepts when applying the appropriate audit judgement to evaluating the significance of detected misstatement.…”

“…The literature indicated a general tendency for authors to focus on the following four components of audit methodology: (1) the business risk approach (BRA) to auditing (Bell et al, 1997;Gay, 2002;Gray & Manson, 2005;Knechel, 2007); (2) professional judgement on materiality (Bell et al, 1997;Iskandar, 1996;Messier Jr. et al, 2005); (3) the application of auditing (Chandler, 1997;Humphrey & Moizer, 1990;van Peursem et al, 2005) and accounting standards (Bell, 1992;Collier et al, 1993 August;Munter & Sacasas, 1996;Specht, 1992); and (4) relying on the work of an expert (Colbert & Scarbrough, 1993;Power, 1997). The following sections are structured according to each of these four components.…”