Materiality Guidance of the Major Auditing Firms

June 14, 2013 Leave a comment

Materiality Guidance of the Major Auditing Firms

Aasmund Eilifsen Norwegian School of Economics (NHH) – Department of Accounting, Auditing, and Law

William F. Messier Jr.University of Nevada, Las Vegas – Department of Accounting; Norwegian School of Economics (NHH) – Department of Accounting, Auditing and Law

June 5, 2013

Abstract: 
This paper examines the materiality guidance for eight of the largest U.S. auditing firms. Knowledge of how materiality guidance is integrated into a firm’s methodology is important for accounting and auditing researchers. Our results show a high level of consistency across the firms in terms of the quantitative benchmarks (e.g., income before taxes, total assets or revenues, and total equity) used to determine overall materiality, the related percentages applied to those benchmarks, the percentages applied to overall materiality for determining tolerable misstatement, and what constitutes a clearly trivial misstatement. We also find that the firms’ guidance for evaluating detected misstatements including qualitative factors and firm guidance for group audits is consistent across firms. However, there are differences in how the firms consider the possibility of undetected misstatements when evaluating detected misstatements. The results offer insights into implementation of standards that provides valuable information for future materiality research as well informing future archival and behavioral research.

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