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Materiality in Auditing(Discuss these abstracts in the context of academic research and recent developments in audit regulation and practice) Essay Example

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Materiality in Auditing(Discuss these abstracts in the context of academic research and recent developments in audit regulation and practice)

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In: 1) the design of audit procedures for mechanisms to detect misstatements; the pursuit of the elimination of audit risk; and, the assessment of the risk of material misstatement as the basis for the audit procedures (Bragg, pp. These variables underscore how materiality forms part of the foundation of sound audit procedures, one that is capable of addressing errors and risks. The defined object of audit underscores this as auditors are expected “to carry out procedures designed to obtain sufficient appropriate audit evidence… [in order] to determine with reasonable confidence whether the financial statements are free of material misstatement” (Auditing Practices Board 1995, par. A good analogy that could map out the relationship is that materiality is inversely related to risk: all other things being equal, as materiality goes up, audit risk goes down and vice versa (Kearns 2007, p.The overall auditing framework that is achieved with a focus on materiality allows the auditor to identify, evaluate and address risks in the financial reporting as well as in determining whether additional audit is necessary. A review of literature on materiality and contemporary audit reveals the permeation of materiality as auditing practice and its role in efficacy of financial reporting. For instance, Brennan and Gray (2005, pp.1) outlined how it became imperative through the years such as after the 1990s period, when the US Securities and Exchange Commission (SEC) Chairman Arthur Levitt cited the need to reform “accounting hocus-pocus” and the misapplications of accounting principles. Materiality is critical when evaluating risks and uncertainties in the financial information. These are inevitable in preparing financial statements but materiality is able to inform the judgment of auditors in assessing whether the information is true and fair (Brennan & Gray, p. Researchers such as Langevoort (2002) and Huang (2005) demonstrated how financial reporting using materiality is critical for stakeholders such as the investors because the decisions made based on financial documents rife with errors will inevitably impact organizational performance because of inappropriate economic decisions.An important aspect to the issue of risk in materiality-audit relationship is abuse. Materiality is largely relegated to the judgment of the auditor since the goal is to achieve a certain degree of flexibility when it comes to reporting financial data. Organizations

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AICPA, 2006. AU Section 312: Audit Risk and Materiality in Conducting an Audit. [online]. Available at: <http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00312.pdf>. [Accessed 9 December 2014].

Auditing Practices Board (APB), 1995. Objective and General Principles Governing the Audit of Financial Statements. Statement of Auditing Standards No. 100. London: Auditing Practices Board.

Brennan, N. and Gray, S., 2005. The impact of materiality: Accountings best kept secret. Asian Academy of Management Journal, 1(2005), pp.1-31.

Butler, S., 2014. Criminal investigation launched into Tesco’s accounting. The Guardian. [online]. Available at: <http://www.theguardian.com/business/2014/oct/29/serious-fraud-office-investigate-tesco>. [Accessed 14 December 2014].

Financial Reporting council (FRC), 2009. Louder than words. UKFRC. Available at: https://frc.org.uk/getattachment/7d952925-74ea-4deb-b659-e9242b09f2fa/Louder-than-words.aspx.

Financial Reporting council (FRC), 2011. Cutting Clutter. [online]. Available at ,https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Cutting-Clutter-Combating-clutter-in-annual-report.pdf>. [Accessed 8 December 2014]..

Financial Reporting Council, 2013. Audit quality thematic review: Materiality. [online]. Available at: <https://frc.org.uk/Our-Work/Publications/Audit-Quality-Review/Audit-Quality-Thematic-Review-Materiality.pdf>.[Accessed 8 December 2014].

Huang, P., 2005. Moody investing and the Supreme Court: Rethinking the materiality of information and the reasonableness of investors, Supreme Court Economic Review, 13(1),99–131.

Gupta, K., 2004. Contemporary Auditing. New Delhi: Tata McGraw-Hill Education.

Kearns, F., 2007. Materiality and the audit report: Its time for disclosure. Rocherster Institute of Technology.

Langevoort, D., 2002. Taming theanimal spirits of the stock market: Abehavioral approach to securities regulation. Northwestern University Law Review, 97, pp.135–191.

Messier, W., Martinov-Bennie, N. and Eilifsen, A., 2005. A review and integration of empirical research on materiality: Two decades later.Auditing: A Journal of Practice & Theory, November 2005. [online]. Available at SSRN: <http://ssrn.com/abstract=786688>. [Accessed 10 December 2014].

Oppel, R.A. and Sorkin, A.R., 2001. Enron admits to overstating profits by about $600 million. New York Times, 9 November 2001.

Palmiter, A., 2008. Securities Regulation: Examples and Explanations. New York: Aspen Publishers.

Riadh, M., Hassan, L. and Njoua, E., 2011. The Impact of Qualitative Factors on Ethical Judgments of Materiality: An Experimental Study with Auditors. International Journal of Business, 16(3), pp.232-243.

Tesco, 2014. Tesco Plc: Annual Report and Financial Statements 2014. [online]. Available at: <http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf>. [Accessed 15 December 2014].

TSC Industries, Inc. v. Northway, Inc. 426 US. 438 (1976).

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