Academic literature on the topic 'Auditors’ fair value materiality judgments'

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Journal articles on the topic "Auditors’ fair value materiality judgments"

1

Hegazy, Mohamed Abdel Aziz, and Samar Salama. "Effects of qualitative factors and auditors’ personal characteristics on materiality judgments." Managerial Auditing Journal 37, no. 3 (February 1, 2022): 305–35. http://dx.doi.org/10.1108/maj-08-2019-2379.

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Purpose The purpose of this paper is to investigate the effect of qualitative materiality factors on auditors’ assessment of materiality and the determination of the type of the auditors’ reports. This paper also analyzes whether differences in personal characteristics of auditors can influence their use of qualitative materiality factors in assessing material misstatements. Design/methodology/approach A questionnaire and experimental case studies were undertaken to determine whether differences in personal characteristics of auditors can influence their degree of reliance on qualitative factors in assessing the materiality of detected misstatements. Descriptive and statistical tests were used to analyze the data collected. Findings The results of this paper show that qualitative materiality factors strongly influence the auditor’s materiality judgments. However, no significant differences were found regarding the effects of auditors’ personal characteristics on the degree to which they rely on the qualitative factors in their materiality judgments. Also, in certain situations, auditors considered factors other than the income for assessing certain misstatements as material and consequently modified their audit reports. Originality/value This paper examines the influence of qualitative factors on auditors’ materiality judgments and develops a list of qualitative factors to be considered by auditors when assessing materiality. It also concludes that the nature of misstatement is the least important qualitative factor considered by auditors when assessing materiality of detected misstatements and that the existence of more explicit or standardized qualitative materiality guidelines would lead to a more uniform judgment among auditors.
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Brink, Alisa G., Fengchun Tang, and Ling Yang. "The Impact of Estimate Source and Social Pressure on Auditors' Fair Value Estimate Choices." Behavioral Research in Accounting 28, no. 2 (April 1, 2016): 29–40. http://dx.doi.org/10.2308/bria-51457.

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ABSTRACT This paper reports the results of an experiment examining whether estimate source (developed by an external consultant or the audit client) interacts with social pressure (obedience pressure from a superior or conformity pressure from a peer) to influence Chinese auditors' judgments of fair value estimates. The results reveal an interaction between the source of the estimate and the type of social pressure. Specifically, Chinese auditors' risk assessments and judgments regarding whether an auditor will investigate further are not influenced by relevant information about a fair value estimate's source when advised to use a questionable estimate by a superior. However, when the same advice is received from a peer, the likelihood of further investigation and auditors' risk assessments are impacted by the estimate's source.
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GRIFFIN, JEREMY B. "The Effects of Uncertainty and Disclosure on Auditors' Fair Value Materiality Decisions." Journal of Accounting Research 52, no. 5 (August 26, 2014): 1165–93. http://dx.doi.org/10.1111/1475-679x.12059.

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4

Bhattacharjee, Sudip, Kimberly K. Moreno, and Nicole S. Wright. "The Impact of Benchmark Set Composition on Auditors' Level 3 Fair Value Judgments." Accounting Review 94, no. 6 (March 1, 2019): 91–108. http://dx.doi.org/10.2308/accr-52402.

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ABSTRACT Auditors frequently use benchmarking analysis to evaluate the appropriateness of a client's estimates. Client management may strategically select benchmark data, making an auditor's evaluation task more difficult. Psychology research suggests that the composition of the benchmark set can lead to contrast effects, because evaluations of an option in a choice set can change based on the inclusion of other options in the set. In Experiment 1, we examine and find that auditors' judgments of the reasonableness of a client-preferred discount rate for a Level 3 investment are inappropriately influenced by the set of peer companies provided by the client as justification. In Experiment 2, audit managers performing the same task similarly exhibited contrast effects. However, as managers' investment experience increased, the influence of contrast effects from the benchmark set decreased. Given the widespread use of benchmark data, contrast effects from benchmark set composition have implications for accounting and auditing contexts.
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5

Christensen, Brant E., Steven M. Glover, and David A. Wood. "Extreme Estimation Uncertainty in Fair Value Estimates: Implications for Audit Assurance." AUDITING: A Journal of Practice & Theory 31, no. 1 (January 1, 2012): 127–46. http://dx.doi.org/10.2308/ajpt-10191.

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SUMMARY The overall complexity and estimation uncertainty inherent in financial statements have increased in recent decades; however, the related reports and services have changed very little, including the format of the balance sheet and income statement, the content in the auditor's report, and the level and nature of assurance provided on estimates. We examine estimates reported by public companies and find that fair value and other estimates based on management's subjective models and inputs contain estimation uncertainty or imprecision that is many times greater than materiality. Importantly, changes in the estimates often impact net income; consequently, the extreme estimation uncertainty also resides in measures such as earnings per share. We do not question the value audits provide to the marketplace, the importance of fair value reporting, or the ability of auditors to deploy up-to-date valuation and auditing techniques. Rather, we suggest that the convergence of relatively recent events is placing an increasingly difficult, and perhaps in some cases unrealistic, burden on auditors. We consider whether the convergence of events in regulation and standard setting may have outstripped auditors' ability to provide the level and nature of assurance currently required on estimates with extreme estimation uncertainty by auditing standards and regulators. We discuss potential changes to financial reporting and auditing standards that may improve the information provided to users and also address the concerns we raise. Finally, we suggest avenues for future research that may be fruitful in addressing how changes to standards would influence the behavior of preparers, auditors, and users. JEL Classifications: M4; M40; M41; M42. Data Availability: All data are publicly available.
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Christensen, Brant E., Steven M. Glover, and David A. Wood. "Extreme Estimation Uncertainty and Audit Assurance." Current Issues in Auditing 7, no. 1 (March 1, 2013): P36—P42. http://dx.doi.org/10.2308/ciia-50447.

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SUMMARY The overall uncertainty inherent in financial statements has increased in recent decades, but the related reports and required level of audit assurance have changed very little. In our study, “Extreme Estimation Uncertainty in Fair Value Estimates: Implications for Audit Assurance” (Christensen et al. 2012a), we examine estimates reported by public companies and find that estimates based on management's subjective models and inputs contain estimation uncertainty that is many times greater than typical audit materiality. We do not question the value that audits provide to the marketplace or the ability of auditors to deploy up-to-date auditing techniques. Rather, we suggest that the convergence of relatively recent events is placing an increasingly difficult and perhaps, in some cases, unrealistic burden on auditors. We discuss potential changes to financial reporting and auditing standards that may improve the information provided to users, and also address the concerns raised in our study.
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7

Hughes, Susan B., Suzanne Lowensohn, and Elise Tefre. "Portable Power: An Application of IAS 16 Including Self-Constructed Assets and the Revaluation Model." Issues in Accounting Education 34, no. 2 (January 1, 2019): 61–71. http://dx.doi.org/10.2308/iace-52391.

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ABSTRACT This teaching case focuses on a privately owned Swiss company that produces and sells high-energy chews favored by European athletes. External investors recently expressed interest in the company. Management hired an international public accounting firm and is currently preparing its first set of audited International Financial Reporting Standards (IFRS) financial statements. The auditors question management's fair value estimations for the land and production equipment, as well as the accuracy of capitalized greenhouse costs included in operating assets. The case emphasizes the need to consult IFRS, form judgments and estimates when determining financial statement content, and draft appropriate note disclosures. Students are also exposed to the complexities of accounting for agricultural assets, a category not often included in financial accounting courses. After working through this case, students should be able to measure fair value and determine the reliability of valuation inputs, appropriately capitalize assets, and draft necessary disclosures.
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8

DiGabriele, James Anthony. "The expectation differences among stakeholders in the financial valuation fitness of auditors." Journal of Applied Accounting Research 17, no. 1 (February 8, 2016): 43–60. http://dx.doi.org/10.1108/jaar-06-2013-0043.

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Purpose – The purpose of this paper is to investigate if there is an expectation gap among accounting academics, accounting practitioners, and users of financial statements in the financial valuation fitness of auditors. Complex reporting standards and current market expectations have the potential to create differences between what third-party users consider to be the responsibilities of the auditor and what auditors believe to be their responsibilities in auditing fair value estimates. Design/methodology/approach – This study surveys the perceptions of accounting academics, accounting practitioners, and users of financial statements and the degree to which an expectation gap exists in the financial valuation fitness of auditors. Survey respondents chose from a five-point Likert scale ranging from “strongly agree” to “strongly disagree.” Findings – This paper proposes two hypotheses. The results for all nine survey items have provided significant evidence that there is a difference in the expectation of the financial valuation fitness of auditors between users of financial statements and accounting practitioners (H1). Additionally, the findings for all survey items present support there is a significant difference in the expectation of the financial valuation fitness of auditors between accounting academics and users of financial statements (H2). Research limitations/implications – A limitation of the current study, as an inherent attribute with survey research, is non-response bias. The only way to evaluate this was to test late responses to earlier results. There were no significant results in these analyses. According to Fink (2003), if there are no significant differences in this indicator the likelihood of non-response bias is extremely low. Hence, this limitation did not have serious implications on the current study. Practical implications – The implications of this study affect the accounting academic community as they prepare students in response to the evolving market expectations (Pan and Perera, 2012). Previous research has pointed toward the sluggish reaction for change in the accounting curriculum relative to external demands (Harvey, 2004; Pan and Perera, 2012). The results of this study also have resonating effects for accounting practitioners. The marketplace expects accountants to be “knowledge professionals” (Carnegie and Napier, 2010). Regulators continue to ask auditors to find more fraud and understand financial valuation (Pan and Perera, 2012). Social implications – Contemporary accounting practice is moving beyond the scope of quantitative recording of historical financial information. Ignoring integral market transformations could result in lower quality audits with corresponding increased litigation against auditors for negligence (Pearson, 2011). Originality/value – This study is important for several reasons. First, users of financial statements have expressed the necessity for auditors to acquire financial valuation skills (Christensen et al. (2012). Therefore, the evidence obtained from users of financial statements in this research will be critical guidance to reconcile expectations. Second, accounting educators have not provided a significant response to teaching fair value concepts in the university curriculum (Carlino, 2012; Hanson, 2013). This research presents a clarion call to accounting educators to align university curriculum toward market expectations (Christensen et al., 2012). Third, the practitioner community has also been criticized for audit deficiencies in fair value. It is critical to understand if additional training in financial valuation is necessary to improve the fair value judgments of practitioners and meet stakeholder’s expectations. Accordingly, the study provides a contribution to practice. Finally, this paper answers the call by Christensen et al. (2012) for future research on the topic of fair value: to “mirror the categories of recommendations of regulators and standard setters.”
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9

Miah, Muhammad Shahin, Haiyan Jiang, Asheq Rahman, and Warwick Stent. "Audit effort, materiality and audit fees: evidence from the adoption of IFRS in Australia." Accounting Research Journal 33, no. 1 (January 2, 2020): 186–216. http://dx.doi.org/10.1108/arj-06-2018-0103.

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Purpose This paper aims to investigate the association between International Financial Reporting Standards (IFRS) effort due to higher levels of material adjustments and audit fees. In addition, this paper tests whether these associations differ between industry specialist auditors and non-specialist auditors. Design/methodology/approach The authors measure IFRS effort by using differences between local GAAP and IFRS. More specifically, they measure the differences in the balances of accounts that are prepared under IFRS as opposed to the previously used Australian Accounting Standards Board (AASB) standards. They posit that higher material adjustments and more risk to fair presentation of financial statements require additional accounting and auditing effort (“IFRS effort”). Findings The authors find that audit fees are higher when accounting standards are more material and complex at an aggregate level. Nevertheless, not all standards are equally complex and/or material and not all individual standards contribute to higher audit fees. In addition, the results show that the positive association between IFRS effort and audit fees is more pronounced when firms are audited by city-level industry specialists than by non-industry specialists. Originality/value Overall, the results are consistent with the prediction of increasing audit fees for firms requiring higher levels of IFRS effort compared to firms requiring lower levels of IFRS effort. The results contribute to the understanding that not all IFRS are equally complex and, thereby, the standards require different levels of auditor effort. Isolating specific standards based on materiality/risk levels is informative to standard setters for standard setting, standard implementation and post-implementation review of standards.
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10

Bratten, Brian, Lisa Milici Gaynor, Linda McDaniel, Norma R. Montague, and Gregory E. Sierra. "The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors." AUDITING: A Journal of Practice & Theory 32, Supplement 1 (May 1, 2013): 7–44. http://dx.doi.org/10.2308/ajpt-50316.

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SUMMARY The rising prominence of fair values and other estimates (FVOEs) to financial reporting increases their significance to the audit. Based on inspections that report numerous deficiencies, the PCAOB is concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value measurements. In this paper, we first analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research. To organize our discussion, we rely on an established theoretical research framework that examines auditor judgment through an analysis of three critical and interactive factors of the judgment process—the environment, the task, and the person (Bonner 2008). We believe that the framework is particularly useful in understanding judgments related to the audits of FVOEs, given that these areas have unique environmental and task factors such that addressing auditor characteristics alone to improve audit quality is likely to be insufficient. Second, considering the PCAOB-identified practice areas with direct implications for the audits of FVOEs, we develop and present future research lines of inquiry that take into account the important interactions among the three framework factors. We believe empirical evidence within these lines will help identify potential sources of, and remedies for, observed audit deficiencies.
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