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

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.

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.

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.

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.

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.

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.

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.”

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.

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.

AbstractThe practice of premature sign off on audit procedures will directly affect the quality of the audit report produced by the auditor, because if one of the steps in the audit procedure is omitted, the possibility of the auditor making wrong judgments will be higher. This study aims to empirically prove the effect of time pressure and audit risk on premature sign off behavior on audit procedures. The population of this study is the auditor in the public accounting firm in Makassar City, Indonesia. Sample selection using census sampling technique. The results of this study indicate that time pressure tends to increase their efforts to prematurely terminate audit procedures (Premature sign Off). Auditors who perceive high audit risk tend to prematurely terminate audit procedures. When the auditor determines that the materiality inherent in the audit procedure is low, there is a tendency for the auditor to ignore the audit procedure because the auditor considers that if there is a material misstatement in the implementation of the audit procedure, the value is not material so that the auditor conducts premature sign off behavior.Keywords: Audit Risk, Premature Sign Off, and Time Pressure AbstrakPraktik premature sign off atas prosedur audit, akan berpengaruh secara langsung terhadap kualitas laporan audit yang dihasilkan oleh auditor, sebab apabila salah satu langkah dalam prosedur audit dihilangkan maka kemungkinan auditor dalam membuat judgment yang salah akan semakin tinggi. Penelitian ini bertujuan untuk membuktikan secara empiris pengaruh antara time pressure dan audit risk terhadap perilaku premature sign off atas prosedur audit. Populasi dari penelitian ini adalah auditor di kantor akuntan publik yang ada di Kota Makassar, Indonesia. Pemilihan sampel menggunakan teknik sampling sensus. Hasil dari penelitian ini menunjukkan bahwa time pressure, cenderung meningkatkan usahanya untuk melakukan penghentian secara prematur prosedur audit (Premature sign Off). Auditor yang merasakan risiko audit yang tinggi cenderung untuk melakukan penghentian secara prematur prosedur audit. Ketika auditor menetapkan bahwa materialitas yang melekat pada prosedur audit rendah maka terdapat kecenderungan auditor untuk mengabaikan prosedur audit dikarenakanan auditor menganggap jika terdapat salah saji material pada pelaksanaan prosedur audit nilainya tidaklah material sehingga auditor melakukan perilaku premature sign off.Kata Kunci: Audit Risk, Premature Sign Off, Time Pressure

Fair value estimates (FVEs) are common in financial reporting and regulators are concerned that auditors are insufficiently skeptical in their FVEs evaluations. Using Nolder and Kadous’s (2018) professional skepticism model, we examine the process by which firm guidance impacts auditors’ skeptical judgments and actions through their cognitive processing of evidence. We find that rewording firm guidance to include either a directional goal instructing them to oppose management’s assertions or a bi-directional goal instructing them to support and oppose management’s assertions lead auditors to gather more conflicting evidence than a directional goal instructing them to support management’s assertions. However, gathering more conflicting evidence does not yield more skeptical actions unless auditors are instructed to support and oppose management’s assertions. This is supported by theory suggesting that attending to both confirming and conflicting information forces individuals to reconcile the inconsistent information, enhancing the likelihood that it will be incorporated in their judgments.

This article summarizes the published study “The Impact of Benchmark Set Composition on Auditors’ Level 3 Fair Value Judgments” (Bhattacharjee, Moreno and Wright 2019), which examines how auditors’ judgments of the reasonableness of a client’s discount rate for a Level 3 investment are impacted by client-provided benchmarks. In two experiments, the authors find that audit seniors’ and managers’ judgments of a client-preferred discount rate for an investment are inappropriately influenced by the set of peer companies provided by the client as justification. Managers are less susceptible than seniors, likely due to highly developed knowledge structures. Results suggest that providing structured audit guidance to the seniors for conducting analyses somewhat reduces but does not eliminate this effect. The study’s findings have implications for other auditing contexts using benchmarking such as goodwill impairment, inventory obsolescence, and valuation estimates and for audit firms when auditing complex estimates and determining staffing of audit engagements.

Some balance sheet items are the result of judgments, including fair value estimates, so the relevant evidence is very complicated to collect by auditors, thus the risk of misstatements in financial statements is inevitably greater. The research objective of this paper is to: a) highlight the problems encountered by auditors from developing countries when auditing FV accounting estimates; b) identify the challenges that auditors from Serbia face in auditing FV accounting estimates; c) consider the possibility of adequately responding to these audit challenges in Serbia. The research confirmed that the problems of auditors in Serbia in the audit of FV estimates are generated by inefficient capital markets, and that they are primarily in the field of FV assessment which are connected to the impossibility of applying the market model and higher volatility of FV financial statements, as well as those in the field of auditing techniques used in providing assurance on the objectivity of FV assessments in various business activities, which requires additional training of auditors. Thus, the research confirmed the similarity of the problems in Serbia with the problems in the auditing FV estimates in developing countries.