Effects of Qualitative Factor Salience, Expressed Client Concern, and Qualitative Materiality Thresholds on Auditors' Audit Adjustment Decisions
Posted: 6 Jul 2007
We conduct an experiment to provide evidence on factors that influence auditors' propensity to book or waive audit differences that affect the client's ability to meet the analysts' consensus forecast and avoid a negative earnings surprise. Results indicate that increasing the salience of a qualitative materiality factor (by highlighting the audit difference's impact on the client's ability to meet the analysts' consensus forecast) increases auditors' propensity to book the audit difference, but only for auditors with lower qualitative materiality thresholds (i.e., the thresholds that auditors use to assess qualitative materiality). Further, the presence of expressed client concern about the adverse consequence of booking the audit difference is found to attenuate the effect of increased salience of the qualitative factor for these auditors. These findings contribute to a better understanding of why auditors may (or may not) waive quantitatively immaterial but qualitatively material audit differences, and the boundary conditions under which mechanisms for enhancing auditors' audit adjustment decisions work (or may not work).
Keywords: Materiality, audit adjustments, qualitative factors, authoritative guidance
JEL Classification: M49, M41, M43, G29
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