Group Audits, Group-Level Controls, and Component Materiality: How Much Auditing is Enough?

51 Pages Posted: 7 Sep 2012

See all articles by Trevor Stewart

Trevor Stewart

Rutgers, The State University of New Jersey; VU University Amsterdam

William R. Kinney, Jr.

University of Texas at Austin - Department of Accounting

Date Written: August 2012

Abstract

Auditing standards now mandate that group auditors determine and implement appropriate component materiality amounts, which ultimately affect group audit scope, reliability, and value. However, standards are silent about how these amounts should be determined and methods being used in practice vary widely, lack theoretical support, and may either fail to meet the audit objective or do so at excessive cost. We develop a Bayesian group audit model that generalizes and extends the single component audit risk model to aggregate assurance across multiple components. The model formally incorporates group auditor knowledge of group-level structure, controls, and context as well as component-level constraints imposed by statutory audit or other requirements. Application of the model yields component materiality amounts that achieve the group auditor’s overall assurance objective by finding the optimal solution on an efficient materiality frontier. Numerical results suggest group-level controls and structured subgroups of components are central to efficient group audits.

Keywords: aggregation, audit assurance, Bayes’ rule, component materiality, group audits, group-level controls, ISA 600

JEL Classification: M41

Suggested Citation

Stewart, Trevor and Kinney, William, Group Audits, Group-Level Controls, and Component Materiality: How Much Auditing is Enough? (August 2012). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2142891

Trevor Stewart (Contact Author)

Rutgers, The State University of New Jersey ( email )

One Washington Park, Room 919
Newark, NJ 07102
United States

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

William Kinney

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-3632 (Phone)
512-471-3904 (Fax)

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