Group Audits, Group-Level Controls, and Component Materiality: How Much Auditing is Enough?
51 Pages Posted: 7 Sep 2012
Date Written: August 2012
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: Suggested Citation