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1 Introduction
The concept of materiality is pervasive in the process of any audit of financial statements because of its use at all stages when auditors organize, develop and culminate their review. This includes planning and performing the audit, as well as issuing the final report. Even though the concept is perfectly clear and well defined in theory, the way auditors apply and use this concept in practice is one of the more controversial and argued over subjects in this field.
Our focus in this paper is on materiality in the final stage of an audit; that is, when auditors use it to evaluate the significance of uncorrected misstatements, and to make a decision on the content and opinion given in the audit report. To this end, auditors do not have strict and objective criteria that enable them to be completely certain in all cases and situations. Instead, they rely on factors that set mere guidelines to help them better assess the misstatements and make a decision.
The "traditional" approach in assessing materiality at the completion of the audit has been dominantly quantitative. That is, materiality judgments are made in terms of certain quantitative variables that are used to establish numerical benchmarks. As thresholds, these serve to distinguish the significance of audit-detected misstatements. Therefore, the distinction auditors make between material and immaterial misstatements depends almost exclusively on their amount. In this fashion, misstatements above the established thresholds are always considered material, and those below these thresholds are always considered immaterial. However, a number of critiques have been recently given on the matter.
[34] Levitt (1998) was the first to sound the alarm on this erroneous and often deceptive practice in a speech suggestively titled The Numbers Game . The then president of the securities and exchange commission (SEC) showed a strong preoccupation with the common practice in the business world of manipulating company earnings. Within a framework in which company agents, auditors and analysts work together, he announced that its main purpose was to satisfy the general estimations on earnings, thus eroding the quality of the figures published, and creating a worrying deterioration in the quality of financial statements.
Levitt noted that one of the main difficulties in maintaining good company practices is the existence...