Effects of Authoritative Qualitative and Quantitative Guidance Availability on Auditors’ Materiality Judgments

Auditor’s materiality judgment for audit opinion decision is a complicated process as it is affected by inter-personal factors in the auditor-client negotiation context that interact with the criteria established by accounting and auditing standards. Accordingly, the literature on materiality judgement (Ng and Tan [2003], [2007]; Libby and Kinney [2000]; Lee [2008]; Acito, Burks, and Johnson [2009] etc.) has examined the effects of standards and additional authoritative guidance availability of the qualitative and quantitative materiality, focusing on the role of the additional factors (e.g., client governance structure, auditor and client’s risk exposures, client management's earnings management incentives). Prior studies, however, investigate qualitative and quantitative materiality separately at a time, with or without guidances. Our inquiry extends the literature in that it considers qualitative and quantitative materiality together, with and without available authoritative guidances. This study examines the effects of qualitative and quantitative materiality, with and without available authoritative guidances on auditors’ materiality judgments. In addition, we also examine the effect of quantitative materiality in addition to qualitative materiality. We find that qualitative materiality is not attended to by auditors. Qualitative materiality is continued to be ignored even if it is made more salient via qualitative authoritative guidance availability. In contrast, auditors attend to quantitative materiality, with or without guidance. Furthermore, if qualitative materiality is established, quantitative materiality still additionally affects auditors’ materiality assessment. Although quantitative materiality is attended to even without authoritative guidance, availability of authoritative quantitative guidance has a significant incremental effect on auditors' materiality judgments. These results show that the auditors are less attending to qualitative materiality criteria unless there is any explicit risk associated with the judgements while they are attending to quantitative materiality; moreover, the auditors are additionally attending to quantitative materiality if the authoritative quantitative materiality guidance is available. Based on the experiment results, we argue that, for a proper application of materiality criteria, we need to carefully consider whether an explicit guidance for quantitative materiality is necessary or not when it is implemented for regulatory or practice purposes. Also, we need to pay more attentions to properly change the audit practice in applying qualitative materiality.