Abstract:In reviewing contemporary literature on materiality judgement and the audit expectations gap (AEG), this paper considers an apparent void concerning that aspect of the AEG caused by the non‐disclosure of materiality and risk thresholds and criteria in the financial reports. The review enables the formation and discussion of two premises: first, disclosing cornerstone concepts, such as materiality and risk judgements, in financial reports enhances users' understanding of the limitations of information contained… Show more
“…13. De Martinis and Burrowes (1996) argue that there is an inverse relationship between materiality thresholds and another type of risk-audit risk. Chong and Vinten (1996) similarly proposes an audit risk model in which materiality thresholds may vary with audit risk.…”
Section: Resultsmentioning
confidence: 98%
“…In the UK no guidelines have been issued. In Australia, New Zealand, Canada, Fiji, and South Africa (De Martinis & Burrowes, 1996) the standards give more guidance than in the UK and USA although the guidelines are not very specific. Australian accounting standards AAS 5 and AASB 1031 provide a range of 5% to 10% of an appropriate base as a guideline for materiality thresholds, with below 5% being immaterial and above 10% material.…”
“…13. De Martinis and Burrowes (1996) argue that there is an inverse relationship between materiality thresholds and another type of risk-audit risk. Chong and Vinten (1996) similarly proposes an audit risk model in which materiality thresholds may vary with audit risk.…”
Section: Resultsmentioning
confidence: 98%
“…In the UK no guidelines have been issued. In Australia, New Zealand, Canada, Fiji, and South Africa (De Martinis & Burrowes, 1996) the standards give more guidance than in the UK and USA although the guidelines are not very specific. Australian accounting standards AAS 5 and AASB 1031 provide a range of 5% to 10% of an appropriate base as a guideline for materiality thresholds, with below 5% being immaterial and above 10% material.…”
“…There is some evidence that the disclosure of materiality thresholds might enhance users’ understanding of an audit, i.e. perceptions of audit quality (Jennings, Kneer & Reckers, , ; De Martinis & Burrowes, ). Experimental market studies (Fisher, ; Tuttle, Coller & Plumlee, ; Davis, ) have shown that disclosure of materiality improves investor perceptions and leads to greater market efficiency.…”
Section: Prior Research and Research Questionsmentioning
Subsequent to the financial crisis, standard setters developed suggestions for enhancing the audit function, in order to increase financial stability. One related idea is to expand the audit report disclosed to the public, to ensure that it is fit for purpose. This study investigates the impact of expanded audit reports, namely information on the assurance level, materiality levels and key audit matters (KAM), on bank director perceptions of the quality of the financial statements, the audit and the audit report, as well as on their credit approval decisions. We conduct an experiment involving a sample of 105 bank directors and use ANCOVA to determine the predictors of bank director perceptions and decisions. Our findings suggest that disclosing the assurance level has a significantly positive impact. In contrast, we cannot demonstrate a material effect of expanding the audit report to include the materiality level or KAM. As a consequence, standard setters should carefully analyse the effect of additional information before making decisions on expanding the content of the audit report. Such expansions are not necessarily perceived as useful by stakeholders.
“…In summary, they document that internal company error is the primary cause to which company disclosures attribute restatements, although a significant portion of restatements are attributed to accounting standards. Some countries do have professional guidance on materiality including Australia, Canada and South Africa (De Martinis and Burrowes, 1996), but even in these countries the disclosure of materiality thresholds and criteria in the financial reports is not required. The non-disclosure of these concepts, and lack of explanation regarding what, and why information is disclosed makes such reports less understandable and less useful for users' decision making (De Martinis and Burrowes, 1996).…”
Purpose -This paper seeks to focus on the issue of materiality judgements and the need for public disclosure of materiality levels. Insights about the concept of materiality are drawn from the words of users of audited financial reports, auditee managements, suppliers to the market for audit services and auditing standard setters and regulators. Design/methodology/approach -This paper reports findings arising from face-to-face office interviews with individuals representing identified groups of stakeholders in the market for audit services about the issue of "materiality" as this concept is applied in auditing. The interviews canvassed many issues related to audit as part of a larger project entitled "The future of audit". Findings -In general, stakeholders perceive that the concepts involved in audit materiality are not well understood and they point to the difficulty in providing educative materiality about it, especially in relation to qualitative materiality, to retail investors in particular. There are mixed views as to whether the actual level of tolerable error, as per one of the meanings of materiality in the audit space, should be disclosed, with some feeling that it might be detrimental or dangerous. Practical implications -If incremental information about materiality is to be disclosed, the issue of where, what to whom, by whom and when arise. Various suggestions are made by stakeholders in respect of these questions. Originality/value -The paper concludes by drawing from the insights gained by the authors through the comments of participant stakeholders to make recommendations that deal with the issue of audit materiality.
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