Amsterdam Business School

Engagement type, accountability, experience and auditors’

materiality judgments: The effect of different qualitative factors

on professional judgment.

Name: Lieselotte van de Riet

Student number: 10894616

Thesis supervisor: Prof. Dr. Brendan O’Dwyer

Date: June 20, 2016

Word count: 19344

MSc Accountancy & Control, specialization Accountancy

Faculty of Economics and Business, University of Amsterdam

2

Statement of Originality

This document is written by student Lieselotte van de Riet who declares to take full

responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources

other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion

of the work, not for the contents.

3

Abstract

Recently, there is a call to increase regulation in the financial audit profession. The desire for

more regulation is rising due to public scrutiny and increases auditor responsibility to provide

reasonable assurance on the presented financial statements. While prior work has researched

the concept of materiality and the use of materiality to define material misstatements, little is

still known about auditor behavior when determining the materiality level; in particular the

professional judgment related to the process. This study is conducted by an experiment in a

Big 4 professional audit firm in order to provide practical evidence in qualitative factors taken

into consideration by auditors professional judgment when setting the materiality level. This

report examines whether auditors take the factors engagement type and accountability pressure

into consideration, and how these factors affect the materiality level. Moreover, it is analyzed

to see if the experience level of an auditor moderates this effect. The findings of this experiment

indicate that the type of engagement (new or existing) does not influence the level of

materiality, nor is the effect moderated by the level of experience. Yet, accountability pressure

does significantly affect the materiality level. Auditors who are presented with high

accountability, and who confirm the presence of accountability pressure, are determining a

lower materiality level. In addition, the accountability effect is moderated by the level of

experience. For low experienced auditors the materiality level decreases at a higher level when

feeling more accountability strength compared to high experienced auditors. Overall while

taking the limitations of this research into account, the outcome of this thesis contributes to the

clarification of the materiality concept and provides practical insight into auditor behavior.

Key words: Professional judgment, materiality, engagement type, accountability strength,

auditor experience, qualitative factors.

4

Contents

1 Introduction 5

1.1 Background information 5

1.2 Research focus 7

1.3 Research question 8

1.4 Research contribution 9

1.5 Paper structure 10

2 Theoretical background and hypothesis development 10

2.1 Materiality 11

2.1.1 Overall materiality 12

2.1.2 Performance materiality 13

2.2 Professional judgment 14

2.3 Materiality considerations 14

3 Methodology 21

3.1 Experimental design 21

3.2 Sample selection 22

3.3 Experimental procedure 23

3.3.1 Manipulation checks 25

3.4 Validity of internet-based research design 25

3.4.1 Issues of internet -based experiment 26

4 Results 28

4.1 Preliminary analyses 28

4.1.1 Reliability 28

4.1.2 Descriptive of the sample 29

4.1.3 Manipulation checks 31

4.1.4 Correlations 33

4.2 Hypotheses testing 38

4.2.1 Engagement type 38

4.2.2 Accountability 39

4.2.3 Experience 40

4.3 Additional analysis 43

5 Discussion 45

6 Conclusion 48

Reference list 51

Appendix 55

5

1 Introduction

The concept of materiality is an important aspect of the financial reporting process and integrity

of the audit profession. Failures in financial statements of companies such as Enron, WorldCom

and HealthSouth resulted of incorrect application on the level of the significant threshold or by

the failure of auditors to reveal the misstatements (Morrison, 2004; Reinstein & McMillan,

2004). Auditors are held responsible to provide reasonable assurance on the true and fairly

presentation of the financial condition of a business (Sanders et al, 2009; Holm & Zaman,

2012). These financial failures led to a lot of public scrutiny and to the change of the Big 5

audit firms to the Big 4 audit firms by the fall of Arthur Andersen. Experience shows that

financial reporting regulations alone do not protect the reliability of financial reporting. In some

of these financial failures the auditors did find existence of incorrect items, but they were not

taken into consideration (Morrison, 2004; Reinstein & McMillan, 2004). Which, the concerned

auditors explained, was due to the fact that the misstated items were below thresholds or

material items were dismissed by the client as immaterial (Oppel & Sorkin, 2001; Rockness &

Rockness, 2005). Hence, materiality considerations are pervasive and the determination is a

critical factor in various stages of the audit process. The concept of materiality is applied by

the auditor in the planning phase as well as during the performance of the audit to identify

misstatements in the financial statements of the company.

The discussion on the future of the audit profession is growing and the call to improve

quality in reporting and assurance increases (FEE, 2014). The dialogue is encouraged by the

public and has increased since the Authority Financial Market (AFM, 2014) published a report

on the quality of audits of Big 4 audit firms in the Netherlands. The AFM report shows

tremendously negative results to which they conclude that audit firms did not use the right type

and extent of measures to provide a reasonable assurance opinion. Research by Houghton et

al. (2011) reports that the concept of materiality is not widely understood by users of the

financial statements. Thereby, the authors describe that some auditee management and audit

committee members do not grasp the concept of materiality completely (Houghton et al., 2011).

Research into the concept of materiality is scarce (Houghton et al., 2011; Price & Wallace,

2001; DeZoort et al., 2006). On one hand this leads to the question if more regulation is

desirable. The implementation of standards should help to drive the quality of reporting and

can be used as a reference point throughout the audit engagement. On the other hand, auditors

already rely heavily on the use of standards where maybe the profession should rely more on

the behavior of auditors, as standards are not uniformly appropriate for all entities. Following

1.1 Background information

6

this line of thought, when decisions on materiality become more regulated, it would allow

companies to intentionally hide misstatements within the set materiality. Houghton et al. (2011)

explain that if materiality regulations on professional judgment increases extensively, this

information could enable companies to work around these regulations. As through

standardization, the establishment of materiality will become more predictable for the client as

well (Montoya del Corte et al., 2010). The shift from a more rules-based profession to one more

focused on behavior can be achieved by concentrating on professional skepticism and

professional judgment (FEE, 2014). These principles are included in the fundamental principles

of a professional auditor. The Institute of Chartered Accountants of Scotland (ICAS) argues

that a minimum level of standards is necessary, but they should not stifle innovation or the use

of professional judgment (ICAS, 2014).

Professional judgment is an important aspect in the determination of the materiality

level. Professional guidelines on concepts such as materiality are set by the International

Auditing and Assurance Standards Board (IAASB). They pronounce International Standards

on Accounting (ISA). For example, ISA 320 explains that auditor’s determination of

materiality is a matter of professional judgment, and is affected by the auditor’s perception of

the financial information needs of users of the financial statement (IAASB, 2004). Even though

these guidelines identify the concept of materiality, the application of these guidelines by

auditors in practice can be considered fluid.

Standards exist to guide auditors in providing their professional opinion about the

reasonable assurance that the financial statements are true and fairly presented without material

misstatements. Misstatements are defined as items that, individually or aggregated, could

influence the economic decision of users taken based on the financial statement (ISSAI, 2010).

There are different ways to calculate the materiality thresholds. In most cases, to choose a

materiality level a quantitative threshold is chosen with the help of certain rules of thumb.

Afterwards the threshold is adjusted, based on professional judgment, to a preferred level. The

choice of a threshold as well as the level of the determined materiality involves quantitative

and qualitative factors. Quantitative thresholds can be set by standards, however qualitative

factors are assessed by the auditor’s professional judgment. The concept of materiality is

critical in terms of how financial statements are audited and to what extent items are accounted

for (Brennan & Gray, 2005). As is noted above, auditors can mistakenly judge items below the

threshold and falsely see a misstatement as immaterial. This might lead to an incorrect audit

opinion. Furthermore, in some cases, such as Enron, the auditors of Arthur Andersen did

7

recommend audit adjustments and reclassifications, however they were persuaded that the

concerned amounts were immaterial (Oppel & Sorkin, 2001; Norris, 2001; Giroux, 2008).

Thus, auditors follow certain standards to determine the materiality threshold, followed by

procedures carried out based on their own professional judgment.

Driven by the critical aspect of materiality and the rising demand for regulation,

research has been conducted on the concept of materiality. Previous literature has focused on

defining the theoretical concept of materiality and on factors influencing quantitative

materiality thresholds. These studies provided evidence that the most frequently used

quantitative benchmark is 5% or 10% of the net income (Montoya del Corte et al. 2010). Many

of these studies focused on factors, both quantitative and qualitative, taken into consideration

to decide upon audit adjustments (DeZoort et al., 2006; Montoya del Corte et al., 2010). Morris

& Nichols (1988) state that many researchers consistently reported that there is a lack of

consensus amongst auditors making materiality decisions. Despite the widespread

acknowledgement of the importance of materiality, little evidence is giving practical insight

into qualitative factors influencing professional judgment in setting a materiality threshold.

In this research, the identified gap in literature is addressed by providing evidence on factors

influencing professional judgment decisions when determining a materiality threshold from a

Big 4 auditor perspective in a research setting in the Netherlands. In this study qualitative

materiality decisions refer to the decision of determining the materiality threshold, not to

qualitative decisions if an item is materially misstated or not. As previously stated by various

authors, the concept of materiality remains unclear, as there is a lack of clarity regarding the

interpretation and determination of materiality in auditing literature (Houghton et al., 2011;

Price & Wallace, 2001; DeZoort et al., 2006). Assurance providers in the Netherlands perform

financial statement audits, to objectively obtain evidence and evaluate the evidence regarding

assertions about economic actions and events, to ascertain degree of correspondence between

these assertions and established criteria and to communicate these results to the intended users

(Hayes et al., 2014). The assurance providers’ requirements of the financial statement audit

include that the (Hayes et al., 2014):

- Auditor complies with relevant ethical requirements, including independence.

- Auditor plans and performs audit with professional skepticism recognizing that

circumstances may exist that cause financial statements to be materially misstated.

- Auditor exercises professional judgment in planning and performing audit.

1.2 Research focus

8

- Auditor must obtain sufficient appropriate audit evidence to reduce audit risk to

acceptably low level.

As is clear from the requirements above, the audit needs to be exercised with

professional judgment. In the concept of materiality, professional judgment takes note of

surrounding factors. It is important to note that professional judgment should not be mistaken

for professional skepticism. Professional skepticism covers the attitude of an auditor that

should have a questioning and alert mind and that an auditor should be alert to conditions that

may indicate possible misstatement. Whereas professional judgment is not only about the

auditor’s behavior per se but focusses merely on the auditor’s way of making decisions, which

is influenced by training, skills and expertise. The concept of professional skepticism will

therefore not be taken into consideration for this research.

Previous research by Blokdijk et al. (2003), shows which values are considered for

materiality decisions, in a Dutch context. As a result, Blokdijk et al. (2003) find that there is a

nonlinear relation between the client size and the determined materiality and that the materiality

decreases with the complexity of the client. Furthermore, they state that Big 5 audit firms set

materiality levels at a significantly lower threshold than non-Big 5 firms do (Blokdijk et al.,

2003). No further examination has been conducted to other values influencing the

determination of materiality, such as accountability pressure, client-firm tenure and function

level. As a result of the decision not to take these values into consideration, questions arise

regarding the influence of these factors on the auditor’s professional judgment and

considerations to set a certain materiality level. The inability to grasp the full concept of

materiality and the discussion on audit quality instigated by the public are key drivers of this

research. To my knowledge, limited research is available on this matter, and the existing

research is outdated.

The aim of this paper is to unveil qualitative factors that influence auditors in their professional

judgment regarding the decision of setting the materiality level. This study is meant to define

how auditors, of one of the Big 4 auditing firms in the Netherlands, consider qualitative factors

in setting the level of materiality. As research shows, factors such as client size or audit firm

characteristics can increase the level of materiality. In this regard, this research will continue

to look for other qualitative factors that might influence the level of materiality. Since

quantitative factors are set and professional judgment plays a large role in the flexibility of the

concept, this research will collect information about underlying qualitative motivations where

1.3 Research question

9

auditors base their judgment on. As such, this research collects data through an experiment

conducted at employees of a large accounting firm in the Netherlands. The collected data of

the experiment is analyzed to reveal a broader perspective of qualitative motives influencing

the auditor’s professional judgment when determining materiality. In this way, the research

question addressed in this paper will be answered. The research question is formulated as

follows: Are the factors, engagement type, accountability strength and experience affecting the

professional judgment of auditors in their materiality decision?

As point out before, previous researchers have indicated a lack of guidelines in the decision of

setting materiality. The SEC emphasized the vulnerability of focusing solely on quantitative

considerations. Despite concerns of standard regulators, relatively little practical evidence is

existing on the subject of how auditors determine materiality (DeZoort et al., 2006). This study

will extend prior work and fill this outlined literature gap.

This study makes a number of contributions. First, it advances the understanding of the

more practical aspects of the determination of materiality. To operationalize the concept of

materiality it depends highly on professional judgment. In this study the operationalization is

addressed through the perception of auditors in one of the Big 4 firms. In doing so, this study

can reveal what factors auditors consider when determining the materiality level. This allows

this study to uncover differences or similarities in the rationalization of auditors in practice.

Secondly, the focus of this study is on qualitative factors influencing professional

judgment when determining the materiality level, whereas other studies have focused on

quantitative factors and audit adjustments resulting of the materiality level. In this way the

establishment of the materiality is highlighted, instead of practices related to the materiality

level.

Thirdly, this research will be performed on the basis of an experiment. Accounting

research has undergone criticism for not being able to provide practical contributions (Libby

et al., 2002; McDaniel, 1996). The nature of this experiment will provide practical evidence of

a working environment and shows the decision of auditors in a typical audit situation. An

experiment is especially beneficial to examine hypotheses about the direction and influenced

relationships between variables. Audit firms are still unclear about standardized practices to

choose a basic threshold for materiality, which makes it difficult to compare and see

generalization (Accountability, 2006). This experiment provides clarity and practical evidence

1.4 Research contribution

10

in considerations undertaken to determine materiality. By answering the calls to practical

behavioral research, this experiment is a great contribution to accounting literature.

The results of this study contributes to existing literature by providing empirical evidence

of materiality consideration in practice. The results are of relevance because of the lack of

publicly available data to understand the considerations in professional judgment on

materiality. The literature that is existing on the concept of materiality appears outdated. This

research is useful for Big 4 firms as it shows them the rationalization of auditors in deciding

upon the materiality level. And it can contribute to existing literature by providing guidance

covering auditor’s qualitative considerations when determining the materiality, which is asked

for in the article of DeZoort et al. (2003). It provides insight in consensus among auditors in

making materiality decisions. Thereby, it enhances practical knowledge of audit practices.

Which can contribute to current auditors who experience these decisions as well as to students

and less experienced auditors who are learning to grasp the concept of materiality.

The remainder of this paper is structured as follows. In the following chapter, the existing

literature on materiality, influencing factors and the concept of professional judgment is

presented. The literature review serves as a basis of the subsequent research. This is followed

by an outline of the methodology that is adopted in this study. Finally, the findings are

discussed after which conclusions are provided.

2 Theoretical background and hypothesis development

First, the concept of materiality will be explained and standard procedures will be outlined. As

authors have point out, regulations do not provide strict detailed rules of how to determine the

materiality threshold and professional guidelines are nonprescriptive. Consequently, rules of

thumb, qualitative materiality factors and professional judgment will also be discussed in the

following sections.

The overall objective of a financial statement audit is stated as “the basis of an auditor

should be to obtain reasonable assurance about whether the financial statements as a whole are

free from material misstatement, whether due to fraud or error, thereby enabling auditors to

express an opinion on whether financial statements are prepared, in all material respects. And

in accordance with financial reporting framework” (IAASB, 2009). Additionally, there are

some requirements established. One of the requirements is that auditors should plan and

perform audit with professional skepticism to recognize circumstances that may lead to a

material misstatement. Misstatements are material if they are likely to influence the economic

1.5 Paper structure

11

decision of the intended user. Another requirement is that an auditor should apply professional

judgment in planning and performing and audit. Also, the auditor should comply with ethical

requirements and the auditor must gather sufficient appropriate audit evidence (Hayes et al.,

2014).

The International Standards on Auditing (ISA) describes that one of the requirements of an

auditor is to evaluate the effect of an identified misstatement and to assess whether the financial

statements are true and fairly presented and free from material misstatements (IAASB, 2009).

There are various definitions of materiality. In the following section the concept of materiality

will be explained.

The definition of materiality is stated by the Financial Accounting Standards Board

(FASB) as: “Misstatements are considered to be material if it is probable that the judgment of

intended users taken on the basis of the subject matter information is changed or influenced by

the item” (Hayes et al., 2014). One of the global audit guides of a large audit firm makes a

distinction of materiality from an entity point of view, from the audit firm’s point of view and

from the user’s point of view. Materiality from an entity’s point of view is the determined

threshold at which the subject matter information is important enough to be reported and free

from material misstatements that could affect the decisions of intended user’s bases on this

information. Materiality from the audit firm’s point of view is that the audit firm provides

assurance and is able to express an opinion with help of their objectives. Materiality helps to

determine the nature, timing and extent of the evidence gathering procedures. Furthermore,

materiality helps to evaluate whether the subject matter is free from material misstatements.

For the intended users materiality is based on their perspective. For users who rely on the

reported subject matter and with reasonable knowledge, an item is materially misstated when

it is probable that their decision would be changed by the misstatement.

The discussion on the determination of materiality is not a new issue. Previous studies

have described the establishment of materiality and describe it as a time-honored concept.

Edgley (2014) provides detailed literature about the past role of the importance of materiality

and how it has developed. The most prevalent shift in the guidelines of materiality has been

the implementation of rules of thumb. Shifts over legitimacy on quantitative thresholds are still

ongoing. Since a series of financial scandals erupted in the US in the 1970s there are diverse

beliefs about the fixed element of materiality (Edgley, 2014). Previous studies have shown that

the most frequently used rule of thumb amongst auditors has been the choice of the benchmark

2.1 Materiality

12

of materiality level of 5-10% of net income (Messier et al., 2005; Carpenter et al., 1994).

Another often chosen quantitative benchmark is a percentage of net total sales or total revenues,

and a percentage of total assets (Messier et al., 2005; Carpenter et al., 1994). However, on the

decision of these benchmarks the FASB concluded that the same materiality thresholds cannot

be consistently applied in all situations and this is where the assessment of the nature of an item

is necessary, and where professional judgment comes into play (Brennan & Gray, 2005). The

considerations which are influencing the professional judgment, to set a materiality threshold,

will be clarified in the following sections.

2.1.1 Overall materiality

The concept of materiality is used in both the planning phase of the audit as well as the design

of the audit procedures and in evaluation the final financial statements (Brennan & Grey, 2005).

The determined materiality is the threshold at which decisions are likely to be influenced.

Based on the consideration if an item is materially or not financial statement are disclosed.

There are three phases in determination of materiality.

1) Firstly, auditors determine the overall materiality level for the financial statements as a

whole.

2) Secondly, auditors establish an amount less than the determined overall materiality, the

performance materiality (PM) as a basis for designing the audit and to perform control

work and gather evidence to see if a balance sheet item is free from material

misstatements, also referred to as the tolerable misstatement (Eilifsen & Messier, 2014).

3) Lastly, audit evidence is tested with use of a smaller Summery of Corrected

Misstatements (SUM) level to evaluate the validity of one item on a lower level in the

general ledger, such as one invoice.

The chosen materiality level is important as it affects the effectiveness or efficiency of

the audit engagement. Houghton et al. (2011) explain that the level of materiality influences

that weakness of the audit. When the materiality level is higher, the margin at which an item is

material or not is coarser and relatively more items are seen as tolerable misstatements. Due to

the absence of distinct regulated materiality guidelines the matter of determining materiality is

based on professional judgment. The overall materiality can be set on a basis of different

benchmarks. The type of benchmark that auditors choose mostly depends on the company type

and industry. The consideration of materiality for engagements is based on quantitative

principles and qualitative factors. The importance of quantitative and qualitative factors is

chosen by the professional judgment of auditors. There are several factors that may influence

13

the decision which appropriate benchmark to choose can be quantitative and qualitative.

Including the following:

- Elements of the subject matter information, such as assets, liabilities, equity, income and

expenses (IAASB, 2014).

- The important items on which the intended user focusses. This depends on the user, a bank

has different interests than an investor.

- An entity’s earnings. If a company’s earnings are at or near breakeven over a consistent

time period, it is more meaningful to use a benchmark based on total assets or total revenues

instead of profit/loss before tax.

- The way the company is financed and how the ownership structure is. A reasonable choice

of benchmark for a non-profit organization could be total assets or total revenues/expenses

instead of profit/loss.

- Volatility of the entity and its surroundings (IAASB, 2014). When a company’s earnings

are volatile it may be considered to adjust the materiality benchmark, for instance if a

company does not have a lot of profit then it is reasonable to choose for a benchmark based

on costs before a benchmark based on revenues.

2.1.2 Performance materiality

In the planning phase of the audit the materiality level is chosen to reach the objective of an

auditor; to provide an opinion that the financial statements are free from material

misstatements. The materiality concept covered before, is the overall materiality which serves

as a point under which misstatements are considered not material. Subsequently, performance

materiality (PM) is established. Performance materiality is set at less than the total materiality

to reduce to an appropriate low level the probability that the aggregate of uncorrected and

undetected misstatements will exceed overall materiality (Hayes et al., 2014). And is of

importance to avoid that not only individual misstatements are detected, but that individual

immaterial misstatement who can be material when aggregated are not overlooked. The PM is

based on the overall materiality and is decided through certain ‘rules of thumb’ that can be

adjusted upwardly or downwardly based on the auditor’s professional judgment considerations.

The decision which ‘rule of thumb’ to apply depends on the auditors interpretation of risk.

There is an inverse relation between risk and materiality. Auditor’s interpretation of risk is

reflected in the PM. A higher risk, as perceived by the auditor, leads to determine a lower

materiality level. So, the concept of professional judgment is especially present when

determining the performance materiality. The determination of performance materiality is not

based on simple regulated calculations but includes professional judgment and is affected by

14

the auditor’s understanding of the entity and the perceived needs of the users. Hence, the next

section will provide insight into the concept of professional judgment.

The IFAC describes professional judgment as: “The application of relevant training,

knowledge and experience, within the context provided by auditing, accounting and ethical

standards, in making informed decisions about the courses of action that are appropriate in the

circumstances of the audit engagement” (IAASB, 2014). To once address the objective of a

financial audit procedures, one of the objectives of an auditor, while performing a financial

audit, is to use professional judgment in decision making. Despite the fact that accounting

regulations are changing and an increased amount of principles are being implemented,

professional judgment remains an essential part of the auditor role. Professional judgment is

necessary to interpret information for decision making. An auditor cannot make decisions

without experience and the relevant knowledge of the facts and circumstances. With

professional judgment auditors should perform an audit objectively and in the best interest of

the intended users. Although professional judgment decisions are not regulated, but can variate,

auditor decisions may be questioned and in some cases even litigated in court (Kranacher,

2007). Discussion on materiality rules was raised after the fall of Arthur Andersen, who were

being criticized of adopting a mechanical focus instead of professional judgment for the

determination of materiality, which assumable led to the overlooked overstatement of profit

(Edgley, 2014).

Over time, the discussion to increase regulations and adopt ISAs with the aim to increase

comparability and the transparency of financial reporting grew. The concept of materiality is

defined in standards, however the way auditors apply and use materiality in practice is flexible.

The following section will go over several factors influencing the professional judgment of

auditors that makes materiality flexible.

Standard guidelines to determine the performance materiality are applicable. The performance

materiality is chosen by ‘rules of thumb’. The rules of thumb are often a percentage of the

threshold chosen as the overall materiality to take a minor part of the total materiality as the

PM. The percentage is chosen based on an auditor’s professional judgment. The decision on

the materiality level has a massive impact throughout the audit process. As Blokdijk et al.

(2003) describe, by setting a low materiality level, there may be more misstatements detected.

2.2 Professional judgment

2.3 Materiality considerations

15

In the following section previous audit literature is reviewed to see what (qualitative) factors

may influence the professional judgment of auditors when deciding upon a materiality level.

2.3.1.1 Risk assessment

Risk is seen as a dominating factor influencing the professional judgment of auditors. The

foremost risk is that auditors express an inappropriate audit opinion when the financial

statements are materially misstated. Audit risk is a function of the risks of material

misstatement and detection risk. The establishment of the performance materiality reflects the

interpretation of audit risks. A high risk leads to a low materiality level and vice versa. Internal

controls, identified misstatements of prior year’s audit, and other factors are included in the

determination of the performance materiality. The sensitivity of risk perception and fear in

audit decisions has increased dramatically after the Enron scandal and establishment of the

Sarbanes-Oxley Act (SOX) (Guénin-Paracini et al., 2014). The pressure and fear of being held

accountable influences auditors in their work. The authors DeZoort et al. (2006) report in their

research that pressured auditors needed more time to complete audit materiality tasks, because

they lengthen the explanation for their judgments. The auditors who feel strong accountability

need more time to finish the task because they used more qualitative materiality factors then

auditors who perceive lower accountability pressure (DeZoort et al., 2006). In case of having

no means of knowing for sure where the risk lies, fear surfaces (Guénin-Paracini et al., 2014).

So, uncertainty increases fear and an increase in risk perception. In the article of Guénin-

Paracini et al. (2014) they argue that fear for auditors rises from the possibility that material

misstatements are overlooked. And the rising of risk and fear from accountability pressure is

leading to a shift of a more risk-based approach of auditing (Power, 2007). Bedard & Johnstone

(2010) find evidence that risk (financial reporting risk, management integrity risk and internal

control risk) are positively associated with the level of planned audit effort. Moreover, blindly

relying on audit standards, for example quantitative thresholds, does little to reduce the fear of

auditors. Guénin-Paracini et al. (2014) describe fear as the emotional factor of risk and state

that both concepts are closely related.

The IFAC established a relation between audit risk and materiality. This relation is

inverse (IAASB, 2014). A high materiality level relates to a lower audit risk and a low

materiality relates to a higher audit risk. The established relation can be explained through the

reasoning that auditors who assess risk as high do not want to fail at detecting a misstatements

and therefore set the materiality level low. Since, a low materiality level increases the

likelihood of detecting a material misstatement. On the contrary, Arnold et al. (2001) find a

different relation between risk assessment and uncertainty. They examine the effect of

16

uncertainty avoidance on the materiality level and state that increasing the materiality level

serves as measure to decrease uncertainty. Their reasoning explains the contradicting positive

relationship of a high uncertainty, and thus high risk, and a high materiality. Rational behind

the high materiality level to decrease uncertainty, is that a high materiality lowers the chance

of detecting a material misstatement. The materiality decision is therefore influenced by the

person determining the materiality level, his/her professional judgment, and how he or she

perceives risk and uncertainty.

The assessment of risk influences a lot of factors which auditors take into consideration

while determining the materiality level. In this research the effect of risk on the following

variables are examined. The first examined variable is the client-firm tenure and the effect on

the materiality level. Secondly, the effect of accountability strength is examined. These

variables will be explained in the following sections.

2.3.1.2 Client-Firm tenure

Above statements explain that auditors are influenced by the determination of audit risk. When

uncertainty and therefore risk is perceived high, materiality is set low (IAASB, 2014). A lower

level of materiality increases the likelihood that a detected misstatement is above the

materiality level. When a misstatement is detected auditors need to gather additional evidence

to objectively assess that this misstatement is not material. Consequently, a lower level of

materiality may require auditors to gather more evidence (Brennan & Gray, 2005). Which leads

to substantially more audit effort. As can be seen in previous examples, the decision of

materiality influences the nature, timing and scope of the audit (NBA, 2014). Thus, to

determine the materiality there is a cost-benefit tradeoff.

Accounting literature is replete with studies about audit tenure and the effect on audit

quality. Recent experiments show that even the suggestion of a client-firm relationship

negatively affects the judgment of auditors (Barret, 2001). Research suggests that when the

client-firm tenure increases the auditor may become less independent and will decreases his/her

audit effort (Johnson et al., 2002). Moreover, the lack of client-specific knowledge due to a

short client-firm tenure may be possible to overcome by increasing audit effort. This means

that in general, a new audit engagement requires more audit effort. Bedard & Johnstone (2010)

find evidence that auditors respond to risk by increasing the planned audit hours, thus the audit

effort. As is revealed that insufficient time commitment by auditors is a threat to the audit

quality (Holm & Zaman, 2012).

17

Additionally, the research of Stanley & DeZoort (2007) indicates that there is a

significantly negative relation between the likelihood of restatement and the client-firm tenure.

The likelihood of restatement arises when the materiality level is low. Since, a low materiality

levels increases the risk of detected misstatement being material. When material misstatements

exist, restatement is necessary. The established client experience of previous detected

misstatement can be taken into consideration for this year’s audit. It contributes to risk

assessment of the auditor. The magnitude of previously detected material misstatements are

also taken into consideration. An auditor who is appointed to a new audit engagement does not

have this client-specific knowledge. Friedlob & Schleifer (1999), describe that due to the lack

of information, uncertainty exists which leads to a rise in perceived risk. The uncertainty can

lead to a high risk assessment and therefore a lower materiality.

In this respect, the studies (Brennan & Gray, 2005; Johnson et.al, 2002; Bedard &

Johnstone, 2010) suggest a relationship between client-firm tenure and the materiality level.

Namely, a long client-firm relation removes uncertainty and makes auditors determine a high

materiality level. This is confirmed by Shockley (1981) who has concluded that audit firms

have a ‘learned confidence’ as a result of the existing client-firm relationship. Audit firms that

have this ‘learned confidence’, because of a long client-firm relationship, generally perceive

less uncertainty and lower risk which may relate to a higher materiality level. Moreover, a

higher materiality lowers audit effort.

On the other hand, authors Geiger & Raghunandan (2002) state that auditors who are

appointed to a new audit engagement might appoint too little risk to the engagement because

they are lacking client specific knowledge that points to risk. This would mean that the

materiality of new audit engagement would be higher, compared to the materiality of a long

client-firm tenure. Moreover, some other authors (Johnson et al., 2002) are not able to find any

relationship between audit effort and client-firm tenure.

Not only may auditors set a low materiality level for a new client engagement because

of uncertainty, it may also be that auditors determine a higher materiality for existing clients.

An established relationship may be the basis of a high materiality level. Similar to the plentiful

research on audit tenure and lack of independence (Johnson et al, 2002; Montoya del Corte,

2010; Shockley, 1981) it could be that an auditor who has developed a relationship with the

client is not that independent anymore. As many research has point out before, the auditors

may collude with the companies they are actually meant to regulate (Mitchell & Sikka, 1992;

Johnson et al., 2002). Companies want little misstatement to which the chances are smaller

18

with a low materiality. This reasoning suggests that auditors may agree with clients to increase

the materiality when a good relationship has been established.

Auditors are assumable inclined to reduce uncertainty and audit risk by increasing the

materiality level. To test different viewpoints, in this research a positive association of

materiality level with client-firm tenure is assumed. As is expected that auditors are more likely

to consider uncertainty at a new engagement to be higher and audit risk for existing clients to

be relatively lower. The following hypothesis tests this assumption. H1: Auditors determine a

higher materiality level for an existing engagement compared to the materiality level for new

client engagement.

2.3.1.3 Accountability

Accountability can be defined as the requirement to justify one’s behavior to others (Kennedy,

1993). The person someone needs to justify to can be someone outside the audit firm such as

the client or the public as well as upwards justification within the firm to management. DeZoort

et al. (2006) evaluate different levels of accountability pressure and the effect on auditor’s

effort. Their research provides evidence that auditors who feel accountability pressure are more

likely to increase audit effort and spend more time on the audit task in the experiment.

Recently, the financial crisis and corporate scandals have led to a distortion in the trust

of audit professionals (Giroux, 2008). Houghton et al. (2011) describe that the media

speculation of the role of auditors in business failure increased. Furthermore, public scrutiny

rising from negative AFM reviews (AFM, 2014) elevated the demand for auditor

accountability. Carpenter et al. (1994) state that the use of sampling was established from an

economically drive redefinition of auditing objectives, not for the use of fraud detection and or

the examination of the financial statements. These are reasons for auditors to feel an increase

in accountability pressure and to feel the need to show public that they are doing their work

appropriately. Power (2003) describes that the misalignment of social expectations increases

pressure for rationalization and transparency of the audit process. In many countries regulations

are adopted to restore trust and regulate audit quality (Holm & Zaman, 2012). Audit

professionals face pressure to ensure audit quality. In the research of Holm & Zaman (2012) is

concluded that auditors argue to feel strong pressure because of over-regulation.

Auditors who feel more accountability pressure may increase the audit effort. By

increasing audit effort and adding audit hours, auditors can show that they take responsibility.

Not only do auditors feel accountability pressure of public, but they consider legitimacy with

clients as an essential aspect of the audit. The audit profession has an emphasized fiduciary

19

responsibility to the public. Next to increased accountability pressure to the public or

regulators, accountability pressure within the audit firm may increase as well. Decisions may

differ when a person is aware if they are going to be accountable to someone or not, since they

feel more concern for how their decision will be viewed (Buchman et al, 1996). Moreover,

when the preferences of the reviewer are known, people are likely to take a decision consistent

with this preference. This suggests that auditors who are aware of accountability, and therefore

feel accountability strength, adjust their decision on the known fact that their decision will be

reviewed. Earlier experimental research provides evidence to this by showing that auditors,

who were told that their responses to a questionnaire would be reviewed by a partner of the

audit firm, answered differently than auditors who were not told about the review (Buchman

et al, 1996). Research of Bierstaker (2001) reveals that auditors are not only pressured by the

partner to improve audit effectiveness but they also feel pressure to enhance the audit

efficiency. Hence, accountability pressure will differ the professional judgment of auditors

when determining the materiality level. Since accountability affects audit effort and is likely to

have a negative effect on materiality decisions the second hypothesis of this study is: H2:

Auditors determine a lower materiality level when accountability pressure is high.

2.3.1.4 Auditor experience

Previous studies to both auditing and psychology provided evidence that individuals who

obtained experience have a greater total knowledge and these characteristics are important in

assessing risk (Knapp & Knapp, 2001). The definition of professional judgment, includes the

aspect of experience and auditor knowledge as well. Several authors (Carpenter et al., 1994;

Messier et al., 2005; Rigsby et al., 1989) reported that experience of auditors has significant

influence on professional judgment of auditors, and therefore materiality decisions. However,

several other studies suggest that this effect of experience on materiality judgments is not clear

(Blokdijk et al., 2003). Considering the factor of auditor experience, in this study, experience

of an auditor is defined as the function level an auditor has.

DeZoort et al. (2006) stated in their research that the experience level of auditors was

not likely to significantly affect the consideration of materiality judgments, which led to the

decision to remove experience out of their additional research. However, other research on

auditor’s experience shows that auditors with greater experience and knowledge more

frequently recognize error and the cause of errors, fluctuations and anomalies in financial

statements (Low, 2004). Which implies that experienced auditors are also likely to be better in

assessing risk. This is confirmed in the research of Low (2004) who finds evidence that there

20

is a significant positive relation between risk assessment and auditors’ experience. Assumable,

when experienced auditors are better in assessing risk there is less uncertainty.

As previously defined, the definition of professional judgment is based on relevant

training, knowledge and experience. At a new engagement there is no client-specific

knowledge from prior audit years at the client (Sanders et al., 2009). Auditors who do not

obtain client-specific knowledge base their professional judgment on general auditors’

knowledge and experience. Naturally, knowledge and experience of auditors increases along

audit years and rises along function level. The level of experience will moderate the implied

tenure effect on the materiality level. Hence, based on the information that experienced auditors

are better able in assessing risk the third hypothesis is formulated as follows: H3a: The effect

of uncertainty at a new client engagement on the materiality level is stronger for high

experienced auditors than for low experienced auditors.

In addition, earlier is discussed that accountability pressure on auditors is increasing.

Auditors are not only accountable within the firm, but also to the public and the client. The

accountability pressures rises from multiple sources which can have both a desirable and

undesirable effect on the audit quality (Bierstaker, 2001). Associates are accountable to their

superior, similarly managers are accountable to their superior as well as the audit partner who

is accountable to the audit firm and the audit client. Audit firms are hired by companies which

motivates and pressures audit partners to build and maintain a good relationship (Bazerman et

al., 2002). The audit partner is held responsible to set the tone and has the final decision to sign

the audit opinion about the financial statement. And as is discussed in prior literature, the

quality of an audit partner is often seen as an important driver of the overall audit quality (Holm

& Zaman, 2012). These factors all play a role on the accountability pressure audit partners face.

The accountability pressure is emphasized even more through recent audit scandals by

which the image of auditors has been damaged (Barton, 2005). Audit firms may see financial

audits as a way to build a good relationship with a client which provides auditors reason to do

good. Also, to build an auditor-client relationship it can be assumed that the materiality is set

at a lower amount to show effort to the client. A high materiality level may be an indication to

the client that the auditor’s effort is low, which could harm the client-firm relationship. Hence,

it makes sense that audit accountability is increased towards higher function levels (Kennedy,

1993; DeZoort et al., 2006). This information leads to the final hypothesis: H3b: The effect of

accountability strength on the materiality level is stronger for high experienced auditors than

for low experienced auditors.

21

3 Methodology

This section provides an overview of the methodology, sample and characteristics of this

research design.

Given that there are limited existing practical studies into the qualitative factors influencing

professional judgment decisions on the materiality level, it remains a subject that can be further

explored (DeZoort et al., 2006; Houghton et al., 2011; Price & Wallace, 2001). This field study

examines the aim of this thesis on the basis of an experiment; to provide an understanding in

the determination of materiality in practice and specifically the auditor’s professional

judgment. Moreover, it is analyzes to see if the experience level of an auditor moderates this

effect. An experimental field study is perfect for this aim as it provides evidence for claims and

significantly contributes to the scarce existing practical evidence. The process of determining

materiality is complex and mainly based on professional judgment, an experimental research

can offer a better understanding. It focuses on the examination of relationships between

variables and will help providing insight into some type of judgment, decision or behavior. The

experiment will be carried out at a Big 4 audit firm in the Netherlands. Considering the

flexibility of professional judgment decisions auditors make during the audit process and

consistent with the aim of this study it will explicitly focus on qualitative considerations

influencing auditor’s judgment.

The dependent variable is materiality, and the independent variables are engagement

type, accountability and experience. To test the hypotheses the experiment involves 2 x 2

between-subject experimental treatments; new client engagement, existing client-firm tenure

and low experience, high experience. And the 2 x 2 between-subject experimental treatments;

strong accountability, low accountability and low experience, high experience. The between

subject design means that each subject group experiences only one manipulated treatment

(Schulz, 1999). The participants were asked to determine the materiality based on the provided

case which includes one of the manipulated treatments. Through the experiments, results are

obtained on three independent variables, Engagement type, Accountability and Experience,

displayed in the Table 1 and Table 2.

3.1 Experimental design

22

In this experiment participants comprised 66 auditors from a Dutch office of a Big 4 firm. The

group of participants include diverse characteristics with employees of different function levels

and are approached through their company e-mail address. Before sending the experiment to

all participants the experiment is tested by a few audit employees. The survey is sent to all audit

employees of the Amsterdam department of a Big 4 firm. The participants are randomly chosen

and no particular selection of demographical conditions is applied. The nature of the

participants is an important aspect of the experiment. The subjects chosen in this experiment

are all audit professionals and therefore possess the experience necessary to understand the

content of the experiment. Often students are used as substitutes for audit professionals,

however in this case they might not possess all experience to represent the general behavior of

professional auditors. As such, the sample selection of this experiment, professional auditors,

provides confidence in the appropriateness of expertise and understandability to participate in

the experiment.

Table 1 Independent variables

EXPERIENCE

ENGAGEMENT Low High Total

New New engagement * low experienced auditor

New engagement * high experienced auditor

Total new engagement

Existing Existing engagement * Low experienced auditor

Existing engagement * high experienced auditor

Total existing engagement

Total Low experience High experience Engagement type * Experience

Table 2 Independent variables

EXPERIENCE

ACCOUNTABILITY Low High Total

Strong Strong accountability * low experienced auditor

Strong accountability * high experienced auditor

Total strong accountability

Low Low accountability * Low experienced auditor

Low accountability * high experienced auditor

Total low accountability

Total Low experience High experience Accountability * Experience

3.2 Sample selection

23

Table 3 Demographicsa

Description Frequency Percentage (%) Mean Median SD*

Participants

Engagement type

Accountability

Experience

32

34

66

49

51

100

0,50

0,50

0,50

0,50

0,50

0,50

0,508

0,508

0,504

Gender 0

1

Female

Male

26

40

39,4

60,6

0,61 1,00 0,492

Experience in

years

1 - 2

3 - 4

5 - 6

7 - 15

16 - 35

14

20

15

11

6

6,59 4,00 6,736

Function level 1

2

3

4

5

6

Associate

Senior associate

Manager

Senior manager

Director

Partner

11

35

10

7

1

2

16,7

53,0

15,2

10,6

1,5

3,0

2,36 2,00 1,118

Experience 1-4

5-7

Low experience

High experience

34

32

51,0

49,0

0,50 0,50 0,504

*Average per total demographic aMeasurement of variables is displayed in Table 6

The design of this experiment is based on the research of DeZoort et al. (2006), Schulz (1999),

Hodge (2001), and Alexander (2003). Similar to this study DeZoort et al. (2006) examined the

decision of materiality at four different levels of accountability. DeZoort et al. (2006) also used

an experiment as research methodology. The research design in this study is altered as DeZoort

et al. (2006) uses an in-lab experiment design instead of an out-of-lab internet-based

experiment design. There is a lot of theoretical research about the use of the internet for an

experiment compared to a lab-based environment, to present benefits of out-of-lab internet-

based experiments (Bryant et al., 2004; Alexander et al., 2006; Reips, 2002). Although not

many studies have validated this method. The experiment procedures of the studies who have

validated this research method are used as a guideline to this study (Hodge, 2001; Alexander

et al., 2006). Furthermore, to design the experiment the article of Schulz (1999) is followed

closely as to how the internal validity will be secured and how the questions will be able to

explain the professional behavior of auditors.

The survey is distributed to the professional work e-mail addresses of auditors at the Big

4 firm. The e-mail contains a link to Qualtrics, a survey program used by the audit firm. The

program uses the audit firm’s lay-out design and will start by showing all participants the

instructions of the experiment. The instructions of the experiment are equal for each participant.

Also the materials include, in the order presented, expected duration, background information,

3.3 Experimental procedure

24

demographics, company case description, determination of materiality, assessment of company

characteristics and general statements and exit-questions.

In the experiment the level of one dependent variable – materiality - is examined. All

participants are audit professionals and are therefore familiar with the concept of materiality

and relating concepts used in this experiment. The participants determine at what level they set

the performance materiality level based on provided financial statements and a brief company

description. To evaluate which company information the participants consider the experiment

continues with questions about the company description. All four company descriptions differ

and the first questions will examine how the participants assessed the provided information.

The overview of the chronologically experimental procedure is shown in Table 4.

Before the participants are provided with the case the participants are asked to answer

general questions about their demographics, such as function level and gender. This is

purposely done in the beginning, since research reveals that in this way participants are

immediately engaged and less likely to drop-out of the experiment (Bryant et al., 2004).

Then the experiment follows with a brief description of a company. This case description

is based on the case used by DeZoort et al. (2004) who examined different levels of

accountability. Next, the most important figures and results of the financial statements are

presented. The case explanation states that the participant is part of the audit team and is (in

some cases) responsible for determining the materiality. The participants are randomly selected

Table 4 Experiment procedure

Participants: Procedure

ALL

Instructions Demographics; basic questions about function level and gender

Group A

Company description for new client engagement Subject provides assessment on materiality level Manipulation questions based related to new engagement Additional evidence questions

Group B

Company description of existing client of audit firm Subject provides assessment on materiality level Manipulation questions based related to existing engagement Additional evidence questions

Group C

Company description of general company + emphasized responsibility and justification Subject provides assessment on materiality level Manipulation questions based related to high accountability Additional evidence questions

Group D

Company description of general company without any additional factors Subject provides assessment on materiality level Manipulation questions based related to low accountability Additional evidence questions

ALL Exit questions

25

and are not aware of the manipulation in the study. Qualtrics, is designed in such way that each

of the participants is presented with another case description and questionnaire (four in total).

All participants are asked to carefully read the case description and to assume a role of auditor

in an audit team. The participants of group one are specifically asked to determine the

materiality for a company which is a new engagement for the audit firm. The second group of

participants is specifically asked to review a company which is an existing client of the audit

firm. The third group has the responsibility to provide the overall materiality but needs to justify

their decision to an audit partner. Lastly, participant group 4 has to propose the materiality for

a general company without any additional factors. Moreover, all auditors indicate their

function level and year of experience at the audit firm to obtain information related to the

independent variable of experience. This first part of the experiment has to be finished before

continuing to the second part of the experiment.

3.3.1 Manipulation checks

In the second part of the experiment, as part of the post-experimental questionnaire, the

participants are provided with several statements to identify the right characteristic of the case;

engagement type (group 1 and 2) and accountability strength (group 3 and 4). These questions

are meant to check the manipulation and to measure the underlying variables (Schulz, 1999).

The participants who do not correctly identify the right characteristic of the case (engagement

type or accountability) are eliminated from the experiment. This part of the experiment will

test the professional judgment considerations when determining the materiality level. The

participants of group 1 and 2 need to be aware of the common goal in this experiment and

should therefore assess the in engagement type. They do this by indicating the client tenure and

engagement risk uncertainty by the absence (group A) or presence (group B) of previous client

knowledge. The participants of group 3 and 4 should be aware of the perceived accountability

strength by indicating their responsibility and accountability to the audit partner. Additional

questions regarding the theory on qualitative considerations were asked and can be used for

additional analysis on the main findings. An overview of the results of the manipulation can be

found in Table 8.

A lot of theoretical research to the use of internet-based experiment has been conducted. The

outcome of many theoretical studies explain that no significant differences exist between

internet-based experiments or in-lab experiments exist and that internet-based experiments

have some significant advantages (Bryant et al., 2004; Alexander et al., 2006, Reips, 2002)

Internet-based experiments provide new possibilities for exploring behavioral accounting

3.4 Validity of internet-based research design

26

practices (Bryant et al., 2004). The research of Alexander et al., (2006) reveals the results of

both internet-based out of lab experimental as well as in-lab Internet-based experiments. The

main difference was that since the in-lab Internet-based experiments required a restricted

access point, many professionals were not available to return to the office and had to drop out.

Arguably, the foremost benefits for using an out-of-lab experimental research design are

timeliness, inclusiveness and causality. The out-of-lab internet-based experiment provides easy

accommodation through flexible participation settings. So actually the out-of-lab based

experiment was more beneficial on that front. Furthermore, transcription errors that might

occur with a paper-based experiment are dramatically reduced or even eliminated by the use of

internet-based experiment. And since the participants can do the experiment online at any time,

it is unlikely that they will learn information intended for participants of the other condition

(Herron & Young, 2002). The internet-based experiment also provides participants to choose

their own setting without face-to-face contact with other participants or the researcher, which

lowers the sensibility of the subject and prevents participants in giving answers they feel are

desirable.

3.4.1 Issues of internet-based experiment

Internal validity issues may possibly arise in an internet-based experiment and should be

analyzed to minimize the likelihood of occurring. Internal validity issues are defined as the

extent to which participants are influenced in their answers through the methodology of the

research, in this specific case the internet. Internal validity is correct when the variation in the

dependent variable can be attributed to the variation in the independent variables (Libby et al.,

2002). The main argument to believe that the validity threats are not prevalent is because of

the use of random groups. There is no reason to believe that one event or threat is existing in

one group, but not in the other. In this way the occurrence of unforeseen events is not

attributable. Furthermore, importantly internal validity is remained due to the random

allocation of treatments to the subjects (Schulz, 1999). In the following section six potential

issues of internet-based experiments are discussed (Birnbaum, 2000; Reips 2002). Moreover,

it is explained how these issues are mitigated in this experiment.

One possible issue when using internet-based experiment design is the chance of

multiple submissions. In the survey program Qualtrics an additional control check exists that

participants cannot access the survey once they have already participated. If participants try to

do so, they receive a message that they already participated in the survey. Furthermore since

the participants are recruited through their company e-mail address, which cannot be assessed

27

by others or on other non-firm devices, the sample size is confined and will be refrained from

unwanted solicitations or multiple submissions.

Secondly, the issue of lack of experimental situation control. The problem of control

occurs for internet-based experiment because compared to in-lab experiments the distribution

of the experiment does not occur in real-life. In this survey the distribution of the survey is

controlled by the program Qualtrics. This survey program can randomize the distribution in an

even way. In this way, the four different cases are evenly distributed to the participants without

taking participants conditions into consideration or without additional controlled conditions.

Arguably, this also increases the generalization of the results (Birnbaum, 2000).

Self-selection is the most serious issue for web based experiments since subjects can

voluntarily choose to participate in the survey. The issue of self-selection which rises at web

based experiments might exist because some participants may naturally be more interested in

the research subject then others. In this experiment the entire targeted sample consists of

professional auditors. Materiality is one of the essential parts of the auditor profession which

makes it unlikely that audit professionals would not be interested in this concept. The problem

of self-selection is lowered due to the targeted sample without using supplement samples such

as students. Furthermore, the purpose of the study is to identify the materiality decision of the

auditor for which the participants have to assume that they are a part of the audit team and

responsible for the materiality determination. This is a role which they naturally have to do as

part of the audit profession. There is no good or bad decisions in the professional judgment of

materiality determination which avoids the likelihood of manipulation of one’s answers.

Another possible issue for web based experiments is the likelihood of high dropout rates.

To decrease the likelihood of rising dropout rates, this experiment starts with a so-called warm-

up phase. Starting with a personal demographic questions makes the participants more involved

in the experiment and minimizes the likelihood of participants dropping out (Bryant et al.,

2004; Birnbaum, 2000). Other aspects that are used to decrease the likelihood of high dropout

rates is the use of an attractive survey design, which is in this case the design of the audit firm

itself. Besides, it is emphasized that the participation is fully anonymous, it will only take a

short amount of time, and it is not to test the knowledge of the auditors.

The fifth issue which may harm internal validity of internet-based experiments is that

there is no interaction with participants. This means that the instructions need to be very clear

as this cannot be explained by the researcher. The clarity of the experiment will be tested by

28

means of a pilot. Furthermore, the survey program Qualtrics is used by the audit firm more

often, which increases the understandability of the program for the participants. This makes

that initial training to familiarize participants with the survey system not necessary. And finally

in the end of the survey the participants get the possibility to provide comments in a text box.

Lastly, technical variance might be a validity issue for internet-based experiments.

Technical problems can always be an issue when using technical instruments. The pilot test

eliminates unclear aspects of the survey. In this research the survey is distributed to participants

work e-mail address which can only be accessed at the office or on their work laptop via a VPN

log-in. In this way, the use of hardware, such as the computer, monitor and use of software is

controlled. Furthermore, after the distribution of the survey participants could contact the

researcher, however no technical issues were reported.

4 Results

In the following section data is analyzed and interpret. Furthermore, the section provides

preliminary conclusions, analyses obtained data and displays the most important results.

4.1 Preliminary analyses

4.1.1 Reliability

To assess the reliability of the data, Cronbach’s alpha are calculated. Cronbach’s Alpha

measures the consistency of the measurement, in this study a Likert scale of 1 “highly disagree”

to 7 “highly agree” is used. To provide reliable analysis on the collected data a minimal

Cronbach’s alpha threshold of at least 0,5 is desired. The reliability is measured per survey

dimension. Questions are grouped and categorized and the results are depicted in Table 5.

The outcomes of the Cronbach’s alpha in Table 5 reveal that around 50% to 70% of the

variance in the scores is reliable variance. The first dimension “New engagement” relates to

the questions addressed to participants who audit a new engagement and these questions

analyze whether uncertainty of a new client plays a role in determining the materiality. The

second dimension relates to the participants auditing an existing client and the questions are

Table 5 Reliability Cronbach’s Alpha

Survey dimension Number of times Cronbach’s alpha

New engagement 11 0,514

Existing engagement 11 0,589

High accountability 8 0,664

Low accountability 8 0,507

Experience 2 0,640

29

analyzing the learned confidence auditors have due to obtained client-specific knowledge.

Dimension three is a combination of questions related to the strength of accountability

pressures auditors feel. Dimension four is related to a general client without any accountability

pressure or other factors possibly influencing the accountability pressure. Lastly, dimension

five is a construction of function level and categorized experience in years. An overview of the

most important variables and grouped components for the outcome analysis can be found in

Table 6.

4.1.2 Descriptive of the sample

To provide insight into the aim of this study, namely to provide practical evidence into

the qualitative factors auditors consider in their professional judgment when determining the

materiality level, four hypotheses are tested. These hypotheses are tested throughout a survey

that measures several variables. Table 6 provides an overview with the description and way of

measurement for the most important variables.

Over 66 questionnaires were fully completed and are used for the analysis. The

participants in the sample are all auditors at one of the Big 4 in the Netherlands. The experiment

began by asking demographical data of the participants, which is displayed in Table 3. The

majority of the respondents is male (60%) and is a senior associate (mean=2,36, median = 2,00,

SD=1,118). The average work tenure lies at 3-4 years (mean= 6,59, median = 4,00, SD = 6,74).

30

Table 6 Description and measurement a

Variable Description Measurement Used for

Engagement Case included a description of new or an existing engagement

0 = new 1 = existing

Hypothesis test

Accountability Case included a description with strong accountability or a low accountability

0 = strong 1 = low

Hypothesis test

Gender Gender of participant 0 = female 1 = male

Descriptives

Function level Level of participant in the audit firm 1 = associate, 2 = senior associate, 3 = manager, 4 = senior manager, 5 = director, 6 = partner

Construct for hypothesis test

Experience in year

Number of years working within the audit firm

ratio Construct for hypothesis test

Experience Construction of variables function level * experience recoded as ordinal scale.

0 = low experience 1 = high experience

Hypothesis test

Materiality Determined materiality level by participant

ratio Hypothesis test

Engagement type

Type of engagement as indicated by participant

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Manipulation check

Client-specific knowledge

Knowledge of client as indicated by participant

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Manipulation check

Uncertainty Uncertainty at engagement indicated by participant. Construct of question: uncertainty of risk is high due to missing knowledge of previous year

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Descriptives

Responsibility general

General audit responsibility as indicated by participant

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Manipulation check

Task responsibility

Responsibility to determine materiality as indicated by participant

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Manipulation check

Partner responsibility

Responsibility of audit partner as indicated by participant

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Manipulation check

Justification Need to justify materiality decision to audit partner as indicated by participant

1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neutral, 5 = Somewhat agree, 6 = Agree 7 = Strongly agree

Manipulation check

Pressure Amount of pressure to determine materiality decision as indicated by participant

1 = None at all, 2 = A little, 3 = A moderate amount, 4 = A lot, 5 = A great deal

Manipulation check

a selection of most important variables

31

4.1.3 Manipulation checks

The manipulation of the experiment is tested through the implementation of several controlling

questions. The outcome of these controlling questions is analyzed with the use of the Mann-

Whitney U test, which tests differences between two sample means. The analysis of these tests

is shown in Table 8.

First, participants of group A and B were asked to define the engagement type of

company that was described. This was asked through the following questions: “Company A is

Table 7 Descriptive statistics

Variable Engagement N Meana Mediana SD

Gender new existing

16 16

0,69 0,38

1,00 0,00

0,479 0,500

Function level new existing

16 16

2,38 2,06

2,00

2,00

1,258 0,772

Experience in year new existing

16 16

6,59 5,03

5,00 3,75

7,135 4,184

Task Responsibility new existing

16 16

5,13 4,63

6,00

5,00

1,360 1,628

Engagement type new existing

16 16

6,13 5,94

6,00 2,00

0,619 0,772

Client-specific knowledge new existing

16 16

2,63 5,63

2,00 6,00

1,500 1,025

Uncertainty new existing

16 16

4,56 3,19

5,00 3,00

1,413 1,515

Variable Accountability N Mean Median SD

Gender strong Low

17 17

0,76 0,59

1,00 1,00

0,437 0,507

Function level strong Low

17 17

3,00 2,00

3,00 2,00

1,369 0,707

Experience in year strong low

17 17

9,79 4,85

6,00 4,00

9,521 3,605

Responsibility general strong low

17 17

5,76 5,35

6,00

6,00

1,147 1,115

Task Responsibility strong low

17 17

4,53 4,29

5,00 4,00

1,829 1,404

Partner responsibility strong low

17 17

6,06 5,18

6,00 6,00

1,144 1,912

Seriousness strong low

17 17

6,12 6,00

6,00 6,00

0,485 0,791

Justification strong low

17 17

6,24 3,41

6,00 3,00

0,664 1,873

Pressureb Strong Low

17

17

2,59

2,12

3,00

2,00

1,176

0,781

aMeasurement is based on a Likert scale from (1) “Strongly disagree” to (7) “Strongly agree”. bMeasurement is based on a scale from (1) “None at all”, to (5) “A great deal”.

32

a new client” and “Company A is an existing client”. In the survey a 7-point scale anchored

“Totally disagree” (coded as 1) and “Totally agree” (coded as 7). To view and compare the

results of both participant groups the outcome of the second question is reversed. In this way

the means of how the engagement is perceived, either new or not new, can be compared. The

results reveal that the mean score of participants of a new engagement (mean rank = 24,5) is

higher than the mean for the existing companies (mean rank = 8,5) and this difference is

significant (U = 0,00, p < 0,01). This outcome shows that the participants correctly classified

the first case as a new engagement and the second case as a not new (thus existing) engagement.

Secondly, the participants were asked to acknowledge if they have client-specific

knowledge from previous audit years at this client. The following questions were asked: “In

this scenario, I have no client-specific knowledge from my own experience of previous years

at this client” and “In the described scenario, I have client-specific knowledge from previous

audit years at this client”. The outcome of the first question is reversed to compare results to

the question if auditors have specific knowledge from previous tenure. The results show that

the mean score of participants of a new engagement (mean rank = 9,69) is lower than the mean

for the existing companies (mean rank = 23,31) and this difference is significant (U = 19,00, p

< 0,01). Which indeed shows that participants in group A indicate that they do not have client-

specific knowledge and participants in group B indicate that they do have client-specific

knowledge. Hence, it can be concluded that the manipulation for the engagement type is

successful.

To test the effectiveness of the second manipulation of accountability strength several

controlling questions were implemented. The most important question to test the manipulation

is the following: “In this case scenario, I do not have to justify my materiality level

determination to the audit partner.” The outcome depicted in the table shows a mean rank of

12,91 for auditors who were provided with a strong accountability case scenario and a mean

rank of 22,09 for auditors provided with the general case description (U = 66,500, p < 0,05).

This confirms the success of the second manipulation.

Additionally, questions are combined to continue the analysis of the manipulation.

Results show that the mean score for participants presented with a strong accountability case

(mean rank = 20,09) feel more responsible than participants within group D (mean rank =

14,91), who were presented with a general case. Furthermore, the mean rank of auditors who

indicate themselves as responsible is a little higher for respondents who are presented with the

strong accountability case (18,79), compared to respondents who are presented with the general

33

case (16,21). And auditors who indicate that the responsibility of determining the materiality

lies at the partner is slightly higher for participants in group C (19,56) compared to participants

of group D (15,44).

Overall, these questions indicate that the participants of group C, who had to justify their

materiality decision to the audit partner, felt more responsible than participants of group D.

Subsequently, the auditors who feel more responsible themselves also indicate a higher partner

responsibility. The difference for these responsibility outcomes however are not significant (U

= 100,500, p > 0,05; U = 122,500, p > 0,05; U = 109,500, p > 0,05). Finally, the results show

that auditors who had to justify their decision indicated higher sense of pressure (19,68)

compared to auditors who did not need to justify (15,32). However, this difference is not

significant (U = 107,500, p>0,05).

Table 8 Manipulation test; Mann Whitney Ua

Dependent variables Participant group N Mean rank Sum of

Ranks

Mann-

Whitney U

Asymptotic

sig. (2-tailed)

Engagement type of case New engagement Existing engagement

16 16

24,5 8,5

392,00 136,00

0,000 0,000

Client-specific knowledge New engagement

Existing engagement

16

16

9,69

23,31

155,00

373,00 19,000 0,000

Responsibility general Strong accountability

Low accountability

17

17

20,09

14,91

341,50

253,50 100,500 0,093

Task responsibility Strong accountability

Low accountability

17

17

18,79

16,21

319,50

275,50 122,500 0,440

Partner responsibility Strong accountability

Low accountability

17

17

19,56

15,44

332,50

262,50 109,500 0,207

No justification Strong accountability

Low accountability

17

17

12,91

22,09

219,50

375,50 66,500 0,050

Pressure Strong accountability

Low accountability

17

17

19,68

15,32

334,50

260,50 107,500 0,182

aDependent variables are: engagement type indication, client-specific knowledge, responsibility of own, responsibility of

auditor, no justification, pressure

Independent variable: engagement type (new vs. existing)

4.1.4 Correlations

Table 9 and Table 10 provide an overview with outcomes of the correlation tests for the most

important variables. Table 9 shows the correlations for the treatment engagement type and

Table 10 shows the correlations for the accountability strength, both tables include the third

variable of experience. There is chosen to show the Pearson r correlation, which is the most

used measurement and the non-parametric Kendall tau B, which is most accurate in case of a

small sample size and because many scores have the same rank (Field, 2009). Since almost no

34

variables are above 0,9 the likelihood of multicollinearity is minimal and will not be further

discussed (Field, 2009).

The engagement type correlations table shows that auditors who acknowledge the

existing engagement type of the case description correlates significantly positive to the

responsibility (Pearson r =0,723, Kendal tau b = 0,607, p < 0,01). So in general, the majority

of auditors who answer the controlling questions correctly also indicate high responsibility.

Furthermore, on contrary to primary expectations, although not significantly, there is a small

negative correlation between the materiality and engagement type (Pearson r = -0,125, Kendal

tau b = -0,090, p > 0,05). This correlation suggests that when engagement type increases (0 =

new engagement, 1 = existing engagement), the materiality level decreases. Finally, the

correlation overview shows a significant positive correlation for auditors who acknowledge the

case as an existing client and the indication of obtained knowledge (Kendal tau b = 0,475, p <

0,05; Pearson r = 0,474, p = < 0,10). This expectation is previously explained as learned

confidence. The longer auditors work at the same client the more client-specific knowledge

auditors obtain that can ensure confidence of auditors. These findings and assumptions are

assessed later on in the analysis. This correlation is emphasized by the correlation between

auditors who are presented with a new client engagement that indicate to have low obtained

knowledge (Pearson r = 0,090, p = > 0,05; Kendall tau b = 0,07, p < 0,10). Which may confirm

the expectation that auditors who have no experience at the client miss client-specific

knowledge.

Furthermore, Table 10 shows the correlation between general responsibility and

experience. In the beginning of the table it can be seen that experience and responsibility is

positively correlated. Which means that when the experience of auditors increase (0 = low

experience, 1 = high experience) the responsibility increase along (Pearson r = 0,286 p > 0,05,

Kendall tau b = 0,333, p < 0,05). Thus, higher functioning auditors feel more responsible.

Subsequently, there is a positive correlation between accountability and the materiality level

(Pearson r = 0,343, Kendall tau b = 0,258) which is significant (Pearson p = < 0,05, Kendall

tau b p = < 0,10). This correlation is confirm expectation and indicates that when the

accountability goes up (0 = strong, 1 = low), when auditors are provided with the low

accountability case, the materiality level also increases. Also, a negative and significant

correlation is found between the accountability and the need to justify (Pearson r = -0,719,

Kendall tau b = -0,670 , p = < 0,01). Thus, auditors presented with the case scenario in which

they do not need to justify, confirmed low accountability. This outcome is similar to the

35

manipulation check of justification which will be analyzed in the next section. Finally, auditors

indication of pressure is, as expected, negatively correlated to accountability, thus the auditors

presented with a high accountability case indicate higher pressure compared to auditors

presented with a low accountability case (Pearson r = -0,236, Kendall tau b = -0,214, p > 0,05).

Finally, auditors indication of pressure might be negatively correlated to the materiality level

(Pearson r = -0,081, Kendall tau b = -0,171), although this correlation is not significant.

36

Table 9 Correlations Engagement

Gender Experience Engagement Materiality Responsibility general

New engagement

(manipulation)

Existing engagement

(manipulation)

Obtained knowledge low

Obtained knowledge

high

Gender Pearson Correlation Sig. (2-tailed)

1 .062 .617

-,313* ,081

-,170 ,122

-,075 ,648

-,294 ,236

-,598** ,015

-,181 ,452

-,245 ,303

Experience Pearson Correlation Sig. (2-tailed)

,062 ,621

1 -,252 ,161

-,147 ,176

,319** ,053

,000 1,00

,224 ,360

-,296 ,219

-,014 ,951

Engagement Pearson Correlation Sig. (2-tailed)

-,313* ,081

-,252 ,164

1 -,090 ,573

-,186 ,259

.

. . .

.

. . .

Materiality Pearson Correlation Sig. (2-tailed)

-,071 ,572

-,020 ,874

-,125 ,502

1 -,170 ,247

,417 ,064

-,095 ,664

,213 ,331

,064 ,766

Responsibility general

Pearson Correlation Sig. (2-tailed)

-,250 ,168

,246

,175

-,170 ,353

,000 ,998

1 -,220 ,348

,607*** ,007

,139 ,539

,360* ,100

New engagement (manipulation)

Pearson Correlation Sig. (2-tailed)

-,309 ,244

-,026 ,923

.b ,000

,113 ,688

-,336 ,203

1 . .

,407* ,079

.

.

Existing engagement (manipulation)

Pearson Correlation Sig. (2-tailed)

-,626*** ,009

,237 ,377

.b ,000

-,043 ,873

,723*** ,002

.b .

1 . .

,475** ,035

Obtained knowledge low

Pearson Correlation Sig. (2-tailed)

-,197 ,464

-,380 ,147

.b ,000

,066 ,814

,629*** ,009

,090 ,741

.b .

1 . .

Obtained knowledge high

Pearson Correlation Sig. (2-tailed)

-,228 ,396

-,017 ,950

.b ,000

,074 ,786

,470* ,066

.b .

,474* ,064

.b .

1

Non-parametric Kendall’s tau B correlations are presented above the diagonal and, Pearson correlations are presented below the diagonal line

***. Correlation is significant at the 0.01 level (2-tailed).

**. Correlation is significant at the 0.05 level (2-tailed).

*. Correlation is significant at the 0.10 level (2-tailed).

37

Table 10 Correlations Accountability

Gender

Experience

Accountability

Materiality

Responsibility general

Task responsibility

Partner responsibility

Justification

Pressure

Seriousness

Gender Correlation Sig. (2-tailed)

1 -,189 ,279

-,193 ,076*

,096 ,554

-,124 ,419

-,049 ,758

,073 ,636

-,046 ,772

,108 ,518

Experience Correlation Sig. (2-tailed)

,062 ,621

1 -,178 ,307

-,147 ,176

,333** ,040

-,158 ,305

,308 ,052

,188 ,225

-,210 ,191

,130 ,437

Accountability Correlation Sig. (2-tailed)

-,189 ,285

-,178 ,315

1 ,258* ,097

-,272* ,093

-,119 ,440

-,200 ,207

-,670*** ,000

-,214 ,182

-,045 ,786

Materiality Correlation Sig. (2-tailed)

-,169 ,174

-,020 ,874

,343** ,047

1 -,040 ,782

,044 ,750

,042 ,769

-,004 ,974

-,171 ,232

,008 ,955

Responsibility general

Correlation Sig. (2-tailed)

,177 ,316

,286 ,102

-,184 ,296

-,126 ,477

1 ,317* ,027

,585*** ,000

,243* ,093

,096 ,522

,505*** ,001

Task responsibility Correlation Sig. (2-tailed)

-,171 ,335

-,209 ,235

-,071 ,688

,174 ,326

,355** ,040

1 -,002 ,987

,097 ,482

,136 ,339

,087 ,556

Partner responsibility

Correlation Sig. (2-tailed)

,071 ,690

,271 ,122

-,277 ,112

-,285 ,102

,700*** ,000

,026 ,882

1 ,254* ,072

-,081 ,578

,403*** ,008

Justification

Correlation Sig. (2-tailed)

,098 ,581

,131 ,459

-,719*** ,000

-,067 ,705

,233 ,185

,013 ,940

,270 ,122

1 ,076 ,596

-,014 ,926

Pressure

Correlation Sig. (2-tailed)

-,134 ,451

-,161

,364

-,236 ,179

-,081 ,650

,087 ,624

,109 ,541

,048 ,787

,062 ,728

1 -,079 ,609

Seriousness

Correlation Sig. (2-tailed)

,064 ,721

,174

,324

-,092 ,605

-,379** ,027

,490*** ,003

,089 ,618

,514*** ,002

-,039 ,828

-,079 ,658

1

Non-parametric Kendall’s tau B correlations are presented above the diagonal and, Pearson correlations are presented below the diagonal line

***. Correlation is significant at the 0.01 level (2-tailed).

**. Correlation is significant at the 0.05 level (2-tailed).

*. Correlation is significant at the 0.10 level (2-tailed).

38

In the following section the outcomes of tests on the data relating to the four hypotheses are

discussed. There are multiple independent variables and one dependent variable therefore there

is chosen for a factorial (between-group) ANOVA (Field, 2009). With the help of the factorial

ANOVA it can be compared if the mean scores of the DV varies between IV groups. Most

importantly for the factorial ANOVA to be reliable is the assumption that independent group

are independent. Which means that in the experiment different participant groups were used

for each treatment. This study is conducted at independent participant groups that differ for

each treatment. After the analysis the hypotheses can be rejected or not. The dependent variable

is the materiality level and the independent variables are engagement type, accountability and

experience.

4.2.1 Engagement type

The first hypothesis states that the dependent variable – materiality – increases when the

engagement is an existing client of the audit firm. To indicate the distinction of an existing

client engagement or a new engagement the participant groups (A and B) were both provided

with different case scenarios. One group was presented with the new engagement case (A) and

participants were explicitly told that they (the auditor and the audit firm) were newly appointed

to the engagement client. In the other group, participants (B) were provided with the existing

client case scenario and were told that they had been auditing this client for four years already.

This is used to analyze whether there is a difference between auditor behavior at a new client-

engagement and at an existing client.

The prediction of hypothesis 1 is tested by the mean materiality level auditors

determine. Table 11 shows the mean for all different categories. For a new engagement auditors

the mean materiality is 198938 (SD =328052), while for the existing engagement the mean

materiality is 98594 (SD = 68453). Contrary to expectations, these results show that the mean

materiality is lower for existing engagement compared to a new engagement. Which suggests

that the existing engagement type lowers the materiality level. To investigate the significance

results of the factorial ANOVA are summarized in Table 12. The results of the Levene’s test

are not significant which indicates that equal variance are assumed. Subsequently to the initial

results on hypothesis one it can be seen that the main effect of the engagement type appears to

be not significant (F = 1,443, p > 0,05). This contradicts the expectations and implies that the

length of engagement does not have a significant increasing effect on the materiality level.

4.2 Hypotheses testing

39

Therefore, no support has been found for hypothesis one and the first hypothesis should be

rejected.

Table 12 Test of between-subjects effects; Engagement * Experience

Source Type III Sum of

Squares

Df Mean Square F Sig.

Intercept 576828896112,495 1 576828896112,495 9,822 ,004

Engagement 84755342087,071 1 84755342087,071 1,443 ,240

Experience 472248866,732 1 472248866,732 ,008 ,929

Engagement * Experience 38996713909,105 1 38996713909,105 ,664 ,422

Dependent Variable: MATERIALITY

4.2.2 Accountability

The second hypothesis states that the dependent variable – materiality – decreases when the

auditor feels strong accountability. To indicate the distinction of a high accountability or low

accountability the participant groups (C and D) were both provided with different case

scenarios. One group was presented with a high accountable case (C) and participants were

explicitly told that they were responsible to determine the materiality level and had to justify

their decision to the audit partner. The other group of participants (D) were provided a very

general case without any indication of responsibility or justification.

The results to test the second hypothesis are reported in Table 13 and Table 14. The

descriptive statistics in Table 13 show differences in means for IV level ‘strong accountability’

(m =70971, SD =27314) and IV level ‘low accountability’ (m =107265, SD =67217). This

suggests that, conform the expectations, auditors determine a lower materiality level when they

Table 11 Descriptive statistics; Engagement * Experience

ENGAGEMENT Experience Mean SD N

new engagement Low experience High experience

153428,57 234333,33

171739,005 420049,402

7 9

Total 198937,50 328051,920 16

existing engagement Low experience High experience

118863,64 54000,00

74232,099 13416,408

11 5

Total 98593,75 68452,713 16

Total Low experience High experience

132305,56 169928,57

118117,730 341577,892

18 14

Total 148765,63 238618,909 32

Dependent Variable: MATERIALITY

40

feel more accountable. The Levene’s test is significant which indicates that equal variances

cannot be assumed. Subsequently, Table 14 displays the results of the factorial ANOVA where

can be seen that the effect of accountability on materiality is significant (F = 4,452, p < 0,05).

Conform the expectations, the general participant group without any additional accountability

pressure indicated a higher mean, suggesting that the lack of justification induced materiality

judgment. These outcomes provide evidence in support of the second hypothesis.

Table 13 Descriptive statistics; Accountability * Experience

ACCOUNTABILITY Experience Mean SD N

strong accountability Low experience High experience

67083,33 73090,91

34369,196 24271,195

6 11

Total 70970,59 27314,414 17

low accountability Low experience High experience

135944,44 75000,00

79967,354 27774,603

9 8

Total 107264,71 67216,562 17

Total Low experience High experience

108400,00 73894,74

72769,254 25064,128

15 19

Total 89117,65 53773,664 34

Dependent Variable: MATERIALITY

Table 14 Test of between-subjects effects; Accountability * Experience

Source Type III Sum of Squares Df Mean Square F Sig.

Intercept 249721716512,956 1 249721716512,956 109,599 ,000

Accountability 10144935609,290 1 10144935609,290 4,452 ,043

Experience 6113307305,795 1 6113307305,795 2,683 ,112

Accountability * experience

9079789829,239 1 9079789829,239 3,985 ,055

Dependent Variable: MATERIALITY

4.2.3 Experience

The third hypothesis assumes that auditor experience is increasing the effect of the independent

variables on the dependent variable, materiality. To determine the experience of auditors,

participants were asked to provide information on their function level and their work tenure.

The function level is classified into 7 categories and the work tenure is a ratio variable. These

variables together are computed into an ordinal variable which splits the participants into two

groups, one with high experience and one with low experience.

41

To test hypothesis 3a the descriptive statistics in Table 11 can be considered. For a new

engagement auditors with low experience the mean materiality is 153428 (SD =171739), while

for the existing engagement the mean materiality is 118864 (SD = 74232). The mean

materiality of high experienced auditors for a new engagement is 234333 (SD = 420049) and

for an existing engagement 54000 (13416). This indicates that the mean materiality is lower

for existing engagement and that this effect is stronger when the auditor has high experience

compared to low experience. However, when looking the outcome of the factorial ANOVA in

Table 12 it can be seen that neither the effect of experience (F =0,008, p>0,05) nor the

interaction between the engagement type and experiment is significant (F = 0664, p > 0,05).

The analysis on hypothesis 3a implies that experience is not significantly increasing the effect

of engagement type on the materiality level. Hence, hypothesis 3a is not supported.

In the results of the correlation test (Table 10) we could already see that there is a

positive correlation between the experience of auditor and their increased sense of

responsibility. To look further into this correlation the results of the factorial ANOVA can be

examined. The descriptive statistics regarding hypothesis 3b are displayed in Table 13. The

results reveal that as expected the mean materiality of high experience auditors is lower (73895)

compared to low experienced auditors (108400). The effect of experience level, on the

materiality level in general, is not significant (F = 2,683, P > 0,05). However, the results show

that when feeling highly accountable, the mean of auditors with low experience is 67083 (SD

=34369) and when auditors do not feel accountable the materiality mean of lower experienced

auditors is 135944 (SD =79967). The mean materiality of auditors with high experience who

feel highly accountable is 73091 (SD =24271) and when not feeling highly accountable the

mean is 75000 (SD = 27775). The interaction effect of experience*accountability is significant

(F =3,985, P > 0,10).

Additionally, the interaction effect for both hypotheses (3a and 3b) on experience is

displayed in graph 1 (interaction engagement type * Experience) and graph 2 (interaction

accountability * experience). The first graph shows the interaction effect of engagement type

and experience. Overall, it seems that the materiality level decreases for an existing

engagement type. The decreasing effect is steeper for high experienced auditors than for low

experienced auditors, which indicates that the experience level interacts. However, as stated

before this interaction is not significant. Secondly, graph 2 displays the interaction effect of

accountability and experience. Overall, experienced auditors indicate a lower materiality level

42

and for both groups the level of materiality is increasing when auditors indicate lower

accountability. Furthermore, especially for low experienced auditors it can be seen that the

level of experience is moderating the effect of accountability on the materiality level.

Hypothesis 3b expected a moderating effect on high experienced auditors, however this graph

clearly reveals that the accountability pressure effect is especially acknowledged by low

experienced auditors. The effect is significant, but reversed of expectations. Hence, both

hypothesis 3a and hypothesis 3b are not supported and can therefore rejected.

0

20000

40000

60000

80000

100000

120000

140000

160000

Strong Low

Mate

riality

(m

ean

)

Accountability

Graph 2 Interaction; Accountability * Experience

Low experience

High experience

0

50000

100000

150000

200000

250000

New Existing

MA

TE

RIA

LIT

Y (

mean

)

ENGAGEMENT

Graph 1 Interaction; Engagement* Experience

Low experience

High experience

43

The exit questionnaire included several questions that allow to provide a better understanding

in the reasoning of the auditors on the concept of materiality. This additional analysis will

either strengthen the acceptation or rejection of the hypotheses. Outcomes related to the

additional analysis can be found in Table 15.

Previously, we could see that there is a significant correlation between obtained client-

specific knowledge and engagement type and that this manipulation was successful in the

experiment. The Mann-Whitney U test reveals a significant difference between client-specific

knowledge and the engagement type (see Table 8). From the descriptive Table 7 we can see

that the median answer of the question “I have client-specific knowledge from my own

experience of previous audit year at this client” is for participant group 2 (2) “Disagree” and

the auditors in the participant group B (existing engagement) we can see a median of (6)

“Agree”.

Next, an analysis of the auditors own opinion on client-specific knowledge can help to

emphasize previous findings. The following question is analyzed: “In general, uncertainty of

audit risk increases due to client-specific knowledge obtained during previous years”. This

question is reversed to see if client-specific knowledge indeed lowers uncertainty and therefore

audit risk. In Table 15 under the label “uncertainty” is displayed that the median of all

participants is (6) “Agree”, which indicates that auditors themselves indeed confirm that client-

specific knowledge decreases uncertainty. Subsequently, when asked how auditors perceive

client knowledge or general audit knowledge importance when determining the materiality, the

majority of auditors indicate to “somewhat agree” that client-knowledge is more important

(median = 5, SD = 1,378). Moreover, the results show that participants agree that an auditor

with client experience is better able in determining the materiality than an audit partner who is

newly appointed to the engagement (median = 5,00, SD 1,14). Which indicates that even

though the audit partner has a higher function level, which suggests more general audit

experience, client-specific knowledge outweighs this. Finally, participants could provide their

opinion of why they have chosen a certain benchmark and thus materiality level. When

examining the opinions most participants provide arguments about the stability of results and

some explicitly refer to the engagement type of the company. Argument related to the new

engagement include: “Given the recent appointment”, “new engagement will affect PM”, “it

regards a first-year audit”, “new client therefore choosing lower range of materiality”, “first-

year audit” and “relatively low materiality which suits the fact that it is a first-year audit”.

4.3 Additional analysis

44

Overall, the participants who included one of these references adjusted the materiality to a

lower level. Participants of an existing engagement included the following references: “history

without misstatements”, prior years unqualified opinions”, “limited risk based on prior year

audits”. These argument would assume that auditors take these elements into consideration,

but the factorial ANOVA results were not significant.

Regarding hypothesis 2, the opinion of auditors was asked about the accountability

pressure. Findings related to these questions are displayed in Table 15. Previous literature has

stated that auditors are accountable to the client and that auditors may see the financial audit

as a way to build a relationship with a client. Similar to Mitchell & Sikka (1992) who state that

auditing practices may be used as legitimization in social relationships. A low materiality level

increases the audit effort which is a way to show the client that the audit is taken seriously and

that the auditor is willing to spend reasonable time. It may be beneficial for auditors that they

can determine the materiality by professional judgment. Results show that auditors prefer

principles based above rules based when determining the materiality (median = 6, SD = 1,249).

Furthermore, literature reveals that a higher level of materiality leads to more time and effort.

And it was assumed that a higher materiality would harm the relationship which was asked to

the participants. Yet, results show that participants are neutral on this subject (median 4,00, SD

= 1,215). Auditors do not necessarily feel that a high materiality level would harm the client-

firm relationship.

Additionally, in the survey auditors were asked to indicate if they think that

accountability pressure would lower the materiality level. Previously, the factorial ANOVA

indicated that there is a significant effect of accountability and the materiality level. And

participants indicate to somewhat agree with this (median = 5,00, SD = 1,527). Overall, this is

in line with the previous findings that the level of accountability pressure affects the materiality

level which confirms the support for hypothesis 2.

45

5 Discussion

In this research is revealed how auditors determine materiality by using their professional

judgment. First, determining qualitative factors and, second, are these factors taken into

consideration in practice. The operationalization of the concept materiality, was examined by

assessing auditor’s decision on materiality. The process of determining materiality facilitates

fluidity and is shaped by the professional judgment of auditors. Since the last decade public

scrutiny is increasing, some even say the scrutiny is most intense that the audit profession has

ever faced (Barton, 2003). This changes the view of auditor’s responsibility. Even though there

is an increasing call for accounting regulation, the determination materiality remains flexible.

Auditors in this research stated that they prefer a principled-based approach compared to a

rules-based approach. This means that they prefer to use qualitative factors into consideration

when taking decisions. The use of qualitative factors is revealed in this study. I conducted an

empirical study by the means of an experiment with auditors of one of the Big 4 audit firms in

the Netherlands. The experiment is conducted in order to investigate and clarify the concept of

materiality and to provide practical evidence of auditors’ behavior. In the following section the

results of the experiment are analyzed to discuss how auditors use their own judgment next to

the existing rules and principles.

Power (2007) argues that there is a shift towards a more risk-based approach in the

audit profession. Blindly relying on audit standards and regulations is not sufficient anymore

as the importance of qualitative factors in the audit profession increased. The evolution of the

concept materiality is affected by the recent financial crisis and corporate scandals as the trust

of audit professionals is distorting. When not knowing, fear surfaces (Guénin-Paracini et al.,

Table 15 Descriptive statistics 2; Additional analysisa

Label N Mean Median SD

Uncertainty 32 5,125 6,00 1,3137

Client knowledge vs. general audit knowledge

32 5,19 5,00 1,378

Experienced manager > audit new partner

32 4,91 5,00 1,146

High materiality can harm client-firm relationship

34 3,91 4,00 1,215

Accountability pressure decreases materiality

34 4,18 5,00 1,527

Principles based > Rules based

23 5,32 6,00 1,249

aMeasurement is based on a Likert scale from (1) “Strongly disagree” to (7) “Strongly agree”.

46

2014). Since, professional judgement is based on the experience and knowledge of auditors, it

can be assumed there is increased uncertainty at a new engagement. It appears that because of

uncertainty the perception of risk increases. The IFAC define an inverse relationship between

risk and materiality, a high risk assessment relates to a low materiality level and vice versa

(IAASB, 2014). Auditors assigned to a new client engagement are missing client-specific

knowledge because they do not have any prior experience at this client. Missing client-specific

knowledge attributes to uncertainty and less information can make it more difficult to assess

risk. So, uncertainty is a driver of risk and risk is an important factor in the process of

materiality. In this thesis it was expected that auditors who determine the materiality for a new

client engagement, and who have not yet obtained client specific knowledge, will determine a

lower materiality level than auditor who do have client-specific knowledge because of tenure.

The results of the experiment show little evidence which suggest that this effect exists.

On the contrary to expectations, although not significant, the mean materiality level is higher

for a new engagement than for an existing engagement. So, even though auditors explain they

use the fact that the case concerns a new engagement, results imply otherwise. Furthermore,

the majority of the auditors agree that client-specific knowledge helps to determine the

materiality level. Most surprisingly, the outcome reveals that auditors agree that the obtained

client-specific knowledge of a managers outweighs the general audit knowledge of audit

partners.

When only taking the mean into consideration without looking to the significance of

the statistical evidence, we can see that auditors determined a lower mean materiality for the

existing engagement compared to the new engagement. An explanation for these findings can

be, that auditors might indicate too little risk for a new engagement and therefore set a higher

materiality level, as predicted by Geiger and Raghunandan (2002). However, with this

reasoning it suggests that in general, existing engagements are perceived as riskier, because the

participants in this experiment generally indicated a lower mean for the existing engagement.

No specific reasoning points to this argument so, another explanation could be that auditors do

not want to increase the chance of finding a misstatement early in the client-firm relationship

and therefore set a higher materiality level in the early stages of the tenure. It may be that in

the beginning of a client-firm relationship the auditors do not want to increase risk of finding

a misstatement and satisfy the client. This would however contradict previous literature on

audit effort by Barret, 2001, Johnson et al., 2002, Bedard & Johnstone, 2010 and Holm &

47

Zaman, 2012. These authors argue that there is an increased audit effort for a new client

engagement which correlates with a lower materiality level. Furthermore the moderating effect

of experience is not significantly affecting the relation of engagement type on the materiality

level. This means that there is no statistical evidence that high experienced auditors determine

a different materiality level for a new or existing engagement than low experienced auditors.

Additionally, literature states that risk is an influencing factor in the accountability

pressure of auditors. The increasing pressure of being held accountable, or to establish or

remain a client-relationship, affects the auditor professional judgment. In recent years the social

expectations of the audit professional increased pressure. In this thesis it is expected that the

accountability pressure negatively affects the materiality decision. This study reveals evidence

for the effect of accountability pressure on the materiality level. Similarly to prior literature,

revealing that accountability pressure can change auditor behavior (Buchman et al, 1996;

DeZoort et al., 2006). The results of this study reveal that auditors determine a lower materiality

level when accountability pressure is high. The outcome and support for the second hypothesis

is also confirmed by the majority of auditors indicated to “somewhat agree” with the statement

that auditors acknowledge accountability pressure when determining the materiality level.

These results imply that auditors feel pressured to show their audit effort when it is indicated

that they need to justify their decision.

Prior is noted that it is expected that auditors with a higher function level, who have

more experience, generally feel more accountability and therefore indicate a lower materiality

level. In the article of Guénin-Paracini et al. (2014) is argued that fear for auditors rises from

the possibility that material misstatements are overlooked. Bearing this in mind, it makes sense

that high experienced auditors who generally have more responsibility feel increased

accountability compared to low experienced auditors. This was confirmed by the results which

reveal that the mean materiality of high experience auditors is lower compared to low

experienced auditors. So generally the accountability pressure might indeed be higher for high

experienced auditors. This is in line with the statement of Paracini et al. (2014) who say that

the audit partner has the final responsibility and may fear for the possibility that material

misstatement are overlooked. However, the factorial ANOVA results are not significant. The

accountability effect is influenced by the level of experience auditors have, and this effect is

mainly present for low experience auditors. Results show that the significance of the interaction

effect experience*accountability is existent for low experienced auditors. The low experienced

48

auditors clearly determine a higher materiality level when there is less accountability pressure.

When the low experienced auditors need to justify their materiality decision they set a lower

materiality level. Since high experienced auditors generally may have an increased sense of

accountability it makes sense that the effect of accountability, manipulated in this study1, is

stronger for low experienced auditors.

6 Conclusion

By examination of four hypotheses the objective of this thesis, to provide practical evidence

into the qualitative factors auditors consider in their professional judgment when determining

the materiality level, is analyzed. An experimental study is conducted in order to investigate

the professional judgment of auditors when determining the materiality level. The results of

this study advances the general understanding of the concept materiality and answers to the

calls of more practical evidence next to existing theoretical studies. In summary, against

expectations neither support is found for the effect of engagement type on the materiality level

nor for the moderation on this effect by the experience level. Results do reveal a significant

effect of the accountability pressure on the materiality level, increased for low experienced

auditors. These results are in line with prior evidence that auditors change their behavior when

feeling more accountable (Buchman et al, 1996; DeZoort et al., 2006).

This thesis contributes to existing auditing literature and the audit profession in practice.

Firstly, the findings suggest that there are significant effects of qualitative factors on the

materiality level. At this moment the determination of materiality is regulated by quantitative

factors, by percentages and certain rules of thumb. However, it is interesting for audit firms to

see which considerations auditors undertake to choose the right percentage or to decide upon

which rules of thumb to follow. Furthermore, this paper contributes to literature by increasing

the understanding of the practical aspects of auditors’ consideration when determining a

materiality level. Previous theoretical literature might be used to explain expectations on

auditor behavior, but this thesis actually shows practical evidence. Moreover, the findings

suggest that the engagement type might be affecting the materiality level, but on the contrary

of expectations this effect there might be inverse. It might be interesting for audit firms to find

more reasons for auditors to increase or decrease the materiality level for new or existing

1 The accountability pressure was implemented in the provided case by the following statement: “Please note: in this

scenario you are responsible for the materiality judgment and you will have to justify your materiality decision to the audit

partner”.

49

engagements. A lot of research has been performed to the audit tenure effect on audit quality,

to which this study indicates that materiality could be an important issue as well.

This is the first study that links the audit tenure with the materiality level and to show

practical evidence of the qualitative effects. Moreover, the findings of this thesis contribute by

providing information to the necessity for more guidance on materiality. Increased regulations

may lead to more uniform auditor behavior but, regulations may increase accountability

pressure on auditors by standard setters. As, previously revealed auditors argue to feel strong

accountability pressure because of over-regulation (Holm & Zaman, 2012). This thesis shows

that pressure is significantly affecting the materiality level, so it can be questioned if more

pressure is desired. Not only can the information of accountability be useful for standards

setters, also for audit firms it can be beneficial to see the effects of accountability pressure.

Audit firms may use this information to consider the right level of accountability pressure and

maximize audit quality. Overall, audit firms can use the results that indicate significant effect

of qualitative factors on the materiality level to make guidelines and improve audit practices.

The implications of this study need to be considered while taken into consideration the

study’s limitations. First of all, in this experiment a fictitious company description was used

on which auditors had to base their opinion. Although the case description was made very

general and with consent of several audit professionals, it cannot be prevented that some details

of the case description may have influenced results. However, the details in the case description

were similar for all treatment groups to prevent such a limitation as much as possible. Second,

the experiment has been conducted within one of the Big 4 companies in the Netherlands. The

participants in this experiment are all working in the same region, therefore it cannot be

completely ruled out that differences may exist for other parts of the country or other audit

firms. This implicates that the generalization of the findings may be limited by the sample.

Thirdly, the accountability pressure was manipulated as a pressure from within the company.

Auditors had to justify their decision to the audit partner. However, in reality, as mentioned

before, the auditor may not only be affected by accountability within the company, but also by

accountability to the public, the client or standard setters. Due to several reasons, including

time restrictions, it was decided not to distinct the sample by choosing for a certain function

level. And especially, for higher functioning level auditors the effect of accountability may

have been less effective. Moreover, this limitation is seen in the results showing little

moderating effect for high experienced auditors compared to low experienced auditors.

50

The results of this study can point to several directions for future research. Firstly, the

indication that the engagement type may have an effect on the materiality could be further

explored. In this thesis it is shown that auditors determine a higher materiality level for a new

client engagement which was against expectations. This calls for more research on the effect

of tenure on materiality. Several auditors did mention to take the engagement type (new or

existing) into consideration, but there was no statistical evidence to support this. A good way

to assess the auditors opinion may be by conducting in depth interviews with several auditors.

This study also opens up the possibility to seek further practical evidence of other elements of

accountability pressure. Is the increased pressure of public scrutiny, standard setters and

excruciating reports from the AFM affecting the auditor profession, and then mainly the

materiality level. Not only can future research focus on the effect on materiality but also on the

effects of reports such as the AFM on the quality in the audit profession in general. Is it really

desired that there is an increased accountability pressure on professional auditors and is an

increase in rules desired or should there be a shift to an audit approach based on professional

judgment.

51

Reference list

Accountability. (2006). The Materiality Report, Aligning Strategy, Performance and

Reporting.

Alexander, R. M., Blay, A. D., & Hurtt, R. K. (2006). An examination of convergent validity

between in-lab and out-of-lab Internet-based experimental accounting

research. Behavioral Research in Accounting, 18(1), 207-217.

Arnold, D. F., Bernardi, R. A., & Neidermeyer, P. E. (2001). The association between

European materiality estimates and client integrity, national culture, and

litigation. The International Journal of Accounting, 36(4), 459-483.

Autoriteit Financiële Markten (AFM) (2014). Uitkomsten onderzoek kwaliteit wettelijke

controles Big 4- accountantsorganisaties.

Barrett, M. J. (2001). Enron and Andersen-What went wrong and why similar audit failures

could happen again. Available at SSRN 794831

Barton, J. (2005). Who Cares about Auditor Reputation?*.Contemporary Accounting

Research, 22(3), 549-586.

Bedard, J. C., & Johnstone, K. M. (2010). Audit partner tenure and audit planning and

pricing. Auditing: A Journal of Practice & Theory, 29(2), 45-70.

Bierstaker, J. L., & Wright, A. (2001). The effects of fee pressure and partner pressure on

audit planning decisions. Advances in Accounting, 18, 25-46.

Birnbaum, M. H. (Ed.). (2000). Psychological experiments on the Internet. Elsevier.

Blokdijk, H., Drieenhuizen, F., Simunic, D. A., & Stein, M. T. (2003). Factors affecting

auditors' assessments of planning materiality. Auditing: A Journal of Practice &

Theory, 22(2), 297-307.

Brennan, N. M., & Gray, S. J. (2005). The impact of materiality: accounting's best kept

secret. Asian Academy of Management Journal of Accounting and Finance, 1, 1-31.

Bryant, S. M., Hunton, J. E., & Stone, D. N. (2004). Internet-based experiments: Prospects

and possibilities for behavioral accounting research. Behavioral Research in

Accounting, 16(1), 107-129.

Bazerman, M. H., Loewenstein, G., & Moore, D. A. (2002). Why good accountants do bad

audits. Harvard business review, 80(11), 96-103.

Buchman, T. A., Tetlock, P. E., & Reed, R. O. (1996). Accountability and

auditors'judgments about contingent events. Journal of Business Finance &

Accounting, 23(3), 379-398.

Carpenter, B. W., Dirsmith, M. W., & Gupta, P. P. (1994). Materiality judgments and audit

firm culture: Social-behavioral and political perspectives. Accounting,

Organizations and Society, 19(4), 355-380.

DeZoort, F. T., Hermanson, D. R., & Houston, R. W. (2003). Audit committee support for

auditors: The effects of materiality justification and accounting precision. Journal of

Accounting and Public Policy, 22(2), 175-199.

DeZoort, T., Harrison, P., & Taylor, M. (2006). Accountability and auditors’ materiality

judgments: The effects of differential pressure strength on conservatism, variability,

and effort. Accounting, Organizations and Society,31(4), 373-390.

52

Edgley, C. (2014). A genealogy of accounting materiality. Critical Perspectives on

Accounting, 25(3), 255-271.

Eilifsen, A., & Messier Jr, W. F. (2014). Materiality guidance of the major public accounting

firms. Auditing: A Journal of Practice & Theory, 34(2), 3-26.

Federation of European Accountants (FEE) (2014). Opening a discussion: The future of

audit and assurance. Retrieved from: http://www.fee.be/library/list/32-audit-

assurance/1403-opening-a-discussion-the-future-of-audit-and-assurance.html

Field, A. (2009). Discovering statistics using SPSS. Sage publications.

Friedlob, G. T., & Schleifer, L. L. (1999). Fuzzy logic: application for audit risk and

uncertainty. Managerial Auditing Journal, 14(3), 127-137.

Giroux, G. (2008). What went wrong? Accounting fraud and lessons from the recent

scandals. Social research, 1205-1238.

Guénin-Paracini, H., Malsch, B., & Paillé, A. M. (2014). Fear and risk in the audit

process. Accounting, Organizations and Society, 39(4), 264-288.

Hayes, R. S., Gortemaker, J. C., & Wallage, P. (2014). Principles of auditing: An

introduction to international standards on auditing (3rd ed.). Harlow, England:

Pearson Education Limited.

Hodge, F. D. (2001). Hyperlinking unaudited information to audited financial statements:

Effects on investor judgments. The Accounting Review, 76(4), 675-691.

Holm, C., & Zaman, M. (2012, March). Regulating audit quality: Restoring trust and

legitimacy. In Accounting Forum (Vol. 36, No. 1, pp. 51-61). Elsevier.

Houghton, K. A., Jubb, C., & Kend, M. (2011). Materiality in the context of audit: the real

expectations gap. Managerial Auditing Journal, 26(6), 482-500.

International Auditing and Assurance Standards Board. (2014). A Framework for Audit

Quality. New York: IFAC.

International Auditing and Assurance Standards Board (IAASB). 2004. Materiality in

Planning and Performing an Audit. International Standard on Auditing 320 . New

York, NY: IAASB.

International Auditing and Assurance Standards Board (IAASB). 2009. Overall objectives

of the independent auditor and the conduct of an audit in accordance with

international standards on auditing. International Standard on Auditing 200. New

York, NY: IAASB

ICAS (2014). Opening a discussion: The future of Audit and Assurance. Response from

ICAS to FEE. Retrieved from:

https://www.icas.com/__data/assets/pdf_file/0009/2601/F6622-ICAS-Response-to-

FEE-The-Future-of-Audit-and-Assurance.pdf

International Organization of Supreme Audit Institutions (ISSAI) (2010). ISSAI 1320

Materiality in Planning and Performing an Audit. Supplementary guidance on ISA

320.

Johnson, V. E., Khurana, I. K., & Reynolds, J. K. (2002). Audit‐Firm Tenure and the

Quality of Financial Reports*. Contemporary accounting research,19(4), 637-660.

Kennedy, J. (1993). Debiasing audit judgment with accountability: A framework and

experimental results. Journal of Accounting Research, 231-245.

53

Kranacher, M. (2007). Determining materiality: Relativity and professional judgement. The

CPA Journal, 77(8), 80.

Knapp, C. A., & Knapp, M. C. (2001). The effects of experience and explicit fraud risk

assessment in detecting fraud with analytical procedures. Accounting, Organizations

and Society, 26(1), 25-37

Libby, R., Bloomfield, R., & Nelson, M. W. (2002). Experimental research in financial

accounting. Accounting, Organizations and Society, 27(8), 775-810.

Low, K. Y. (2004). The effects of industry specialization on audit risk assessments and

audit-planning decisions. The accounting review, 79(1), 201-219.

Messier Jr, W. F., Martinov-Bennie, N., & Eilifsen, A. (2005). A review and integration of

empirical research on materiality: Two decades later. Auditing: A Journal of

Practice & Theory, 24(2), 153-187.

Mitchell, A., & Sikka, P. (1993). Accounting for change: The institutions of

accountancy. Critical Perspectives on Accounting, 4(1), 29-52.

Montoya del Corte, J., Martínez García, F. J., & Fernández Laviada, A. (2010). Effective

use of qualitative materiality factors: evidence from Spain. Managerial Auditing

Journal, 25(5), 458-483.

Morrison, M. A. (2004). Rush to judgment: the lynching of Arthur Andersen & Co. Critical

Perspectives on Accounting, 15(3), 335-375.

Morris, M. H., & Nichols, W. D. (1988). Consistency exceptions: Materiality judgments

and audit firm structure. Accounting Review, 237-254.

Norris, F. (2001). From Sunbeam to Enron, Andersen’s reputation suffers. The New York

Times.

NBA (2014). NV COS 702n. Aanvullingen met betrekking tot het rapporteren bij een

volledige set van financiële overzichten voor algemene doeleinden bij een

organisatie van openbaar belang.

Oppel Jr, R. A., & Sorkin, A. R. (2001). Enron admits to overstating profits by about $600

million. New York Times (November 1) C, 1.

Price, R. & Wallace, W.A. (2001). Probability and Materiality. The CPA journal, 71(6) 11-

3

Power, M. K. (2003). Auditing and the production of legitimacy. Accounting, organizations

and society, 28(4), 379-394.

Power, M. (2007). Business risk auditing–debating the history of its present. Accounting,

Organizations and Society, 32(4), 379-382.

Reinstein, A., & McMillan, J. J. (2004). The Enron debacle: more than a perfect

storm. Critical Perspectives on Accounting, 15(6), 955-970.

Reips, U. D. (2002). Standards for Internet-based experimenting. Experimental

psychology, 49(4), 243.

Rigsby, J. T., Lambert, K. R., & Alexander, E. R. (1989). Experience And The Quality Of

Managerial Decision Making: The Case of Auditors' Materiality Judgments. Journal

of Managerial Issues, 44-65.

54

Rockness, H., & Rockness, J. (2005). Legislated ethics: From Enron to Sarbanes-Oxley, the

impact on corporate America. Journal of Business Ethics,57(1), 31-54.

Sanders, C. B., Steward, M. D., & Bridges, S. (2009). Facilitating knowledge transfer during

SOX-mandated audit partner rotation. Business Horizons, 52(6), 573-582

Schulz, A. K. D. (1999). Experimental research method in a management accounting

context. Accounting & Finance, 39(1), 29-51.

Shockley, R. (1981), “Perceptions of auditors independence: An empirical analysis”,

Accounting Review, Vol. 56 (4), pp. 785–800.

Stanley, J. D., & DeZoort, F. T. (2007). Audit firm tenure and financial restatements: An

analysis of industry specialization and fee effects. Journal of Accounting and Public

Policy, 26(2), 131-159.

55

Appendix

Case scenario 1:

56

Case scenario 2:

57

Case scenario 3:

58

Case scenario 4: