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
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.
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,
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 1 2 2 .1.2 P erformance materiality 1 3 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 2 5
3.4 Validity of internet -based research design 25
3.4.1 Issues of internet -based experiment 2 6
4 Results 28
4.1 Preliminary analyses 28
4.1.1 Reliability 2 8
4.1.2 Descriptive of the sample 2 9
4.1.3 Manipulation checks 3 1 4 .1.4 Correlations 3 3 4.2 Hypotheses testing 38 4.2.1 Engagement t ype 3 8 4.2.2 Accountability 3 9 4.2.3 Experience 4 0 4.3 Additional analysis 43 5 Discussion 45 6 Conclusion 48 Reference list 51 Appendix 55
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
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
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.
- 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
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
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
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
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
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
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
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
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).
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
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
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
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.
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.
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
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,
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
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
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
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
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 5reveal 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
