Judgment in an auditor's materiality assessments

Rikke Holmslykke Kristensen

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‘Materiality’ is considered a key audit concept both theoretically and in practice, but regulation enforcers are concerned about the different views on materiality held by preparers, auditors, users and enforcers, respectively, because different levels of materiality could result in users having a heterogeneous decision basis. This may seem surprising considering that the rule-of-thumb is simply to calculate materiality as 5% of net income before taxes. By analysing the prior audit materiality literature through a comprehensive literature review, this paper identifies the important quantitative and qualitative components of materiality judgments, which include both task, person and interpersonal interactions in line with general audit judgment and decision-making theory. This analysis offers an enhanced understanding of what the »black box« of professional
materiality judgment contains. The analysis will enable auditors to make more
homogeneous judgments; and it will allow external stakeholders, such as financial statements users, legislators and standard setters, and regulation enforcers to achieve a better understanding of the materiality concept and any divergent materiality decisions.
Original languageDanish
JournalDanish Journal of Management & Business
Issue number2
Pages (from-to)53-65
Publication statusPublished - Sept 2015

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