Differences in Auditors Materiality Assessments When Auditing Fi

Differences in Auditors’ Materiality Assessments When Auditing
Financial Statements and Sustainability Reports*
ROBYN MORONEY, Monash University
KEN T. TROTMAN, UNSW Australia
ABSTRACT
With increased interest in voluntary sustainability reports from investors and other stake-
holders, more companies are having these reports assured. The issue of what is considered
material in these assurance engagements is important, and yet research on materiality has
focused only on financial statement audits. This article reports the results of an experiment
where auditors assess the materiality of audit differences in the same magnitude for both a
financial audit and a sustainability (water) assurance engagement. Two factors, the risk of
breaching a contract and community impact, are manipulated between-subjects. We find
that auditors assess the materiality of an audit difference significantly higher for a financial
case than for a water case. This difference is significantly greater when there is no risk of
breaching a contract than when there is a risk of breaching a contract. The risk of breach-
ing a contract has a stronger effect on the difference in auditors’ materiality assessments
when there is no community impact than when there is a community impact. Overall our
findings suggest that qualitative factors have a greater impact on sustainability (water)
materiality assessments than on financial statement materiality assessments when an audit
difference is between 5 percent and 10 percent of a relevant base. Understanding the factors
that impact material judgments in sustainability reports is important as these factors affect
the reliability of the reported disclosures.

Ecarts dans les evaluations de l’importante relative etablies par
les auditeurs lorsqu’ils procedent
a l’audit d’etats financiers et de
rapports sur le developpement durable

RESUM
E
Compte tenu de l’interêt accru que suscitent les rapports facultatifs sur le developpement
durable chez les investisseurs et autres parties prenantes, davantage de societes font en sorte
que ces rapports fassent l’objet de missions d’assurance. La question de savoir ce qui est
juge capital dans ces missions d’assurance est importante; or, les recherches sur l’impor-
tance relative ont jusqu’a maintenant porte uniquement sur l’audit des etats financiers. Les
auteurs font ici etat des resultats d’une experience dans laquelle les auditeurs evaluent l’im-
portance relative d’ecarts de même ampleur releves dans le cadre d’une mission d’audit
d’etats financiers et d’une mission d’assurance en matiere de developpement durable (de res-
sources en eau). Deux facteurs, le risque de rupture de contrat et l’incidence sur la collecti-
vite, sont manipules entre les sujets. Les auteurs constatent que les auditeurs attribuent a
l’importance relative d’un ecart releve dans le cadre d’une mission d’audit une valeur sen-
siblement plus elevee lorsque la mission porte sur des etats financiers que lorsqu’elle porte
sur des ressources en eau. Cet ecart est beaucoup plus grand lorsque le risque de rupture de
* Accepted by Susan D. Krische. Data Availability: Data and the tasks used in this study are available on
request.
Contemporary Accounting Research Vol. 33 No. 2 (Summer 2016) pp. 551–575 © CAAA
doi:10.1111/1911-3846.12162
Electronic copy available at: https://ssrn.com/abstract=2200753

552 Contemporary Accounting Research
contrat est inexistant que lorsqu’il existe. Le risque de rupture de contrat a une incidence
plus marquee sur l’ecart dans les evaluations de l’importance relative qu’etablissent les audi-
teurs lorsque l’incidence sur la collectivite est inexistante que lorsqu’elle existe. Dans l’en-
semble, les constatations des auteurs semblent indiquer que les facteurs qualitatifs ont une
incidence plus importante sur les evaluations de l’importance relative en ce qui a trait au
developpement durable (de ressources en eau) que sur celles de l’importance relative dans
l’audit d’etats financiers lorsque les ecarts releves dans le cadre de l’audit se situent entre
5 pour cent et 10 pour cent d’une variable de base pertinente. Il est essentiel de comprendre
les facteurs qui influent sur les jugements importants contenus dans les rapports sur le deve-
loppement durable, car ces facteurs ont une incidence sur la fiabilite des informations com-
muniquees.
1. Introduction
While sustainability reporting1 has been in existence for a long period (e.g., Spicer 1978;
Trotman and Bradley 1981), the frequency and amount of information presented has
increased substantially in recent years (KPMG 2011) with many large companies not only
presenting this information in their annual reports but also preparing separate sustainabil-
ity reports. This has led to renewed interest in what drives firms’ corporate social responsi-
bilities or sustainability activities and disclosures (hereafter referred to as “sustainability”)
(e.g., Dhaliwal, Radhakrishnan, Tsang, and Yang 2012; Kim, Park, and Wier 2012).
Concerns have been raised about the reliability and completeness of sustainability dis-
closures (Moser and Martin 2012) and the need for assurance of sustainability reports
(KPMG 2011; Simnett, Vanstraelen, and Chua 2009). While an increased number of these
reports are receiving third-party assurance (Ernst & Young 2010; KPMG 2011; O’Dwyer
2011) and the Big 4 accounting firms are gaining a growing market share (O’Dwyer,
Owen, and Unerman 2011), little is known about the judgments of auditors on these types
of engagements and in particular, about materiality judgments, which are important as
they ultimately affect the reliability of reported numbers (Libby and Brown 2013). These
materiality judgments also form an important input to auditor–client negotiations with
consequent implications for financial reporting (Eilifsen and Messier 2013; Hatfield,
Agoglia, and Sanchez 2008).
Materiality has been considered a key concept in both audit theory and practice for
many decades (Eilifsen and Messier 2013; Messier 1983; Messier, Martinov-Bennie, and
Eilifsen 2005). Previous research has dealt exclusively with traditional financial statement
auditing (Messier et al. 2005) and has not considered auditor materiality judgments in
other assurance engagements.2 With these other assurance engagements becoming com-
mon, it is important for auditors and regulators to understand what impacts auditor mate-
riality judgments on these types of engagements. Our aim is to better understand how
these judgments are made and what factors impact these important judgments (Libby
1981).
Recent research on sustainability assurance has analyzed the content of assurance
reports to better understand how these reports are audited (e.g., Cooper and Owen 2007;
Simnett et al. 2009). In addition, a number of studies have adopted an in-depth case study
approach to examine the processes through which Big 4 sustainability assurance practi-
tioners seek to legitimize this new area of practice (O’Dwyer et al. 2011) and of the nature
1. Sustainability reports have previously been labeled as social responsibility accounting, environmental report-
ing and triple bottom-line reporting. More recently, the term “environmental, social and governance” is
sometimes used.
2. Internationally, the term “assurance” engagement is used. They are comparable to “attestation” engage-
ments.
CAR Vol. 33 No. 2 (Summer 2016)

Auditors’ Materiality Judgments 553
and dynamics surrounding practitioners’ efforts to operationalize sustainability assurance

(O’Dwyer 2011). We take an alternative approach by employing a controlled experiment
to examine the factors that are expected to impact auditor materiality judgments for both
financial statement and sustainability engagements. By comparing auditor materiality judg-
ments of financial disclosures with sustainability disclosures, we control for individual dif-
ferences in materiality judgments, which can be substantial (e.g., Libby and Brown 2013;
Messier 1983).
We selected assurance of water accounting disclosures as the sustainability assurance
engagement context for our study. Our choice was based on the importance internationally
of water and the significant increase in reporting of its use. In the United States, the impact
of water scarcity and declining water quality on businesses has been significant (Ceres 2010;
Hoekstra, Chapagain, Aldaya, and Mekonnen 2011; Morrison, Schulte, and Schenck 2010).
The impact affects demands in a company’s water allotments, resulting in higher costs for
water, greater regulation, and growing community and public scrutiny of company water
usage (Ceres 2009; Hoekstra et al. 2011). In Canada, there is ongoing development of a
water information system and a principles-based standard guides auditors in their assurance
of water information and reports (WASB 2011). In other countries, including Australia,
there is even greater emphasis on water usage (Committee for Economic Development of
Australia 2011).3 We chose water accounting report assurance (hereafter referred to as
“water report assurance”) as opposed to other assurance engagements, such as carbon emis-
sions, as it is likely to be of significant future importance (AWAS 1, WASB 2012) but, at
this point in time, few auditors have experience in this specific type of engagement, and
audit firms have not developed specific programs for water report assurance.4
International standards that guide financial statement audits vary from international
standards that guide assurance of other (including water) disclosures. When making mate-
riality assessments, the standards vary in the role of users, the level of guidance provided,
and the weight allocated to qualitative versus quantitative factors. When conducting a
financial statement audit, auditors are expected to be mindful of the impact on investors
of an audit difference on key thresholds such as profit before tax, which are discussed in
the auditing standards (ISA 320). When assuring water reports, auditors are provided
much less precise guidance about materiality thresholds and primary users are less clear
(AUASB 2012, A38). This is a situation where auditors can use their tacit knowledge of
how to conduct an assurance engagement when faced with vague guidance from assurance
3. The Water Accounting Standards Board (WASB) was established in Australia in 2007 and in 2012 it issued
a water accounting standard AWAS 1 (WASB 2012). The definition of materiality in AWAS 1 is consistent
with the definition used for financial statements but no guidance is provided on an appropriate benchmark
or threshold to use when assessing quantitative materiality (AWAS 1, WASB 2012, paragraph 23). To com-
plement this standard the Australian Auditing and Assurance Standards Board (AUASB) teamed with
WASB to develop a standard on water assurance engagements (AWAS 2, AUASB 2012). This standard
was issued in early 2014 (ASAE 3610/ AWAS 2, AUASB 2014). The paragraphs dealing with materiality
are identical to those in the exposure draft which existed at the time of designing this study.
4. Sustainability disclosures can relate to one particular set of disclosures (e.g., energy, water) or can consist
of a full sustainability report covering economic (e.g., economic performance, market presence), environ-
ment (e.g., energy, water, emissions, waste) and social disclosures (e.g., labor practices, occupational health
and safety, human rights, society—local community, corruption). These disclosures involve a broad range
of measurements including quantitative measurements (water, energy, emissions), number of incidents (work
fatalities, incidents of discrimination and noncompliance with legislation, internal procedures, etc.), and
rates (e.g., rates of injuries, percentages of employees trained in anticorruption legislation). All of these
materiality judgments on different sustainability issues are covered under ISAE 3000. Most of the material-
ity judgments on quantitative amounts (e.g., water, energy, emissions) will consider some percentage of a
base as a potential guideline and thus are likely to draw on their knowledge from financial statement audits
in making these judgments. On the other hand, for some sustainability issues such as child labor and
employee fatalities, a much lower threshold is likely. In fact, any fatality is likely to be considered material.

standards (O’Dwyer 2011). By considering the judgments of experienced financial state-

ment auditors when conducting an audit in an area less familiar to them, we can examine
how this tacit knowledge is transferred.
In this study, we manipulate the type of engagement (financial versus water) within-
subjects and two qualitative factors between-subjects: risk of breaching a contract (pre-
sent/absent) and community impact (present/absent). Eighty-two Big 4 audit managers
and seniors were provided information for both a financial statement audit and a water
report assurance engagement, and were asked to assess the materiality of the audit differ-
ence in each case. Both cases contain an audit difference of the same magnitude uncovered
by the auditor (6.6 percent of the relevant base). As the aim of our study is to learn more
about auditor materiality judgments when assuring sustainability (water) information, we
selected audit differences above 5 percent and below 10 percent as these judgments are
expected to be impacted by qualitative factors when assuring sustainability disclosures,
and because audit partners from participating firms suggested that a difference below 5
percent was unlikely to be material for water assurance.
The focus of this study is on how sustainability (water report) materiality assessments
differ from financial statement materiality assessments. As the audit difference used in this
study is set above 5 percent, financial statement materiality assessments are not expected
to vary significantly across treatments and so act as a within-subject control against which
sustainability materiality assessments can be compared. Based on differences in auditor lia-
bility, differences between audit and assurance standards, and the difference in justification
required, we expect auditors to assess an audit difference as more material for a financial
case than for a water case. This between-case difference is expected to be greater when the
risk of breaching a contract is absent than when it is present and when a community
group is absent than when it is present. We also predict interactions between the two qual-
itative factors.
Results show that, as expected, auditors assess the materiality of an audit difference
significantly higher for a financial case than for a water case, and this between-case differ-
ence is significantly greater when there is no risk of breaching a contract than when there
is a risk of breaching a contract. There is no significant community impact main effect.
We find significant interactions between breach and community impact such that the risk
of breaching a contract has a stronger effect on the difference in auditors’ materiality
assessments in the no community impact treatment than in the community impact treat-
ment, and community impact has a marginally significant (at p = 0.10) effect on the differ-
ence in auditors’ materiality assessments in the no risk of breaching a contract treatment
compared to nonsignificant in the risk of breaching a contract treatment.
Our study makes a number of important contributions to the audit literature. First, it
extends the study of auditor materiality judgments from financial statement audits (Libby
and Brown 2013; Messier et al. 2005) to assurance of sustainability (water accounting)
reports. This is important given the considerable move toward assurance of sustainability
reports, an area where little is known about important audit judgments. Second, it extends
the study of qualitative materiality factors to a setting where there is little guidance. Previ-
ous experimental research on financial statement materiality judgments has shown that
qualitative factors are important (Libby and Kinney 2000; Ng and Tan 2007) in situations
where audit differences do not reach a 5 percent materiality threshold. Here, we extend
this research to examine the impact on both financial and sustainability assurance of a
qualitative factor (breach of contract) for an amount which is between 5 percent and 10
percent of a benchmark. At thresholds between 5 percent and 10 percent, the professional
guidance given to auditors is that the materiality assessment is a matter of professional
judgment. Third, given the importance of other users in sustainability assurance (Moser
and Martin 2012), we manipulate whether both the financial statement and the sustainabil-

ity information are likely to impact only investors, or both investors and local community
groups. For financial statement audits, the primary intended users are investors, whereas
for other assurance engagements there are many more intended user groups. Auditing
standards require that auditors be mindful of intended users when assessing the materiality
of audit differences and yet no previous study has considered the incremental impact
of users other than investors on this assessment.
2. Background and development of hypotheses
Prior literature
Investors are paying more attention to the environment when making investment decisions
(Dhaliwal et al. 2012; Kim et al. 2012; KPMG 2011; Simnett et al. 2009). A variety of
stakeholders, including investors, employees, and consumers are concerned about environ-
mental performance (Ernst & Young 2010; KPMG 2011; Van der Laan, Van Ees, and
Van Witteloostuijn 2008), and accounting for water in particular (Ceres 2009, 2010; God-
frey and Chalmers 2012; Morrison et al. 2010), as well as financial performance. In
response to stakeholder demand, there is an increasing trend for companies to voluntarily
report (Clarkson, Li, Richardson, and Vasvari 2008; KPMG 2011) and assure (Coram,
Monroe, and Woodliff 2009; Ernst & Young 2010; Moroney, Windsor, and Aw 2012;
O’Dwyer 2011; O’Dwyer et al. 2011; Simnett et al. 2009) sustainability disclosures. Assur-
ance enhances the perceived credibility of nonfinancial disclosures (Free, Salterio, and
Shearer 2009) and companies use assurance to build their corporate reputation (Simnett
et al. 2009).
International auditing and assurance standards provide guidance on materiality assess-
ments when auditing financial statements in ISA 320 (IFAC 2009) and assurance engage-
ments other than financial statement audits or reviews in ISAE 3000 (IFAC 2005). The
major differences when making materiality assessments under ISA 320 compared to ISAE
3000 relate to the role of users, the level of guidance provided and the weight allocated to
qualitative versus quantitative factors.5
First, under both ISA 320 and ISAE 3000, auditors are advised to identify intended
users and their needs in establishing and assessing materiality. For financial statements of
profit-orientated entities (ISA 320), investors are considered the primary intended users.
For other assurance engagements (ISAE 3000), the intended user groups are much
broader, they are not as easily identified, and their needs are not as clearly defined. Moser
and Martin (2012) suggest that understanding the role of these nonshareholder
constituents is important in understanding sustainability activities and disclosures.
Second, when setting and assessing materiality, quantitative thresholds are much more
precise for financial statement audits than for other assurance engagements. For financial
statement audits, examples of appropriate benchmarks and factors that may impact the
choice of a benchmark are provided (ISA 320.A3–A7). While it is stated that materiality
involves the exercise of professional judgment, ISA 320 notes that a percentage is often
applied to a chosen benchmark as a starting point. Five percent of profit before tax from
5. Canadian auditing standards are closely aligned with international auditing and assurance standards (CICA
2009). CAS 200 corresponds with ISA 200, CAS 320 corresponds with ISA 320 and HB 5025 provides guid-
ance for assurance engagements other than audits of financial statements. In the United States the relevant
auditing standards are broadly consistent with the international standard on materiality (AICPA 2014). The
international auditing standards and SAS 107 (AICPA 2006, paragraph .04) both acknowledge that materi-
ality is a matter of professional judgment and both sets of standards note that the auditor’s consideration
of materiality is impacted by the needs of users. The international auditing standards provide guidance
around benchmarks and percentages that can be used when setting and assessing materiality, whereas SAS
provides examples of benchmarks which can be used when assessing materiality. Both sets of standards note
that materiality judgments involve both quantitative and qualitative considerations.

continuing operations is given as an example of a materiality calculation often used by

auditors of for-profit orientated entities, with the caveat that higher or lower percentages
may be appropriate in some circumstances (ISA 320.A4 and A7). However, for sustain-
ability assurance engagements, there is no mention in ISAE 3000 of particular bench-
marks. ISAE 3000.23 refers to the need “to understand what factors might influence the
decisions of the intended users.” These factors include relative magnitude, the effect of fac-
tors on the evaluation of measurement of the subject matter, and the interests of intended
users. Thus, the materiality guidelines are much less precise for assurance engagements
than audits of financial statements. Previous research examining situations where auditing
standards are less precise (e.g., what is material on disaggregated income statements) have
found that the level of agreement in materiality judgments can be quite low (Libby and
Brown 2013).
Third, for other assurance engagements, ISAE 3000 states that materiality is consid-
ered in the context of quantitative and qualitative factors (including the interests of
intended users) when assuring information other than financial statements and that the rel-
ative importance of quantitative and qualitative factors for a particular engagement is a
matter of professional judgment (ISAE 3000.23). While the importance of qualitative fac-
tors has been noted in financial statement audits (e.g., Ng 2007; Ng and Tan 2007), previ-
ous research has not considered how and when qualitative factors impact materiality
judgments on other assurance engagements, when much less quantitative guidance is avail-
able. A consequence of these differences is that auditors must rely on incorporating infer-
ences about users and qualitative factors to a far greater extent when auditing other
information than when auditing financial statements.
The differences in audit/assurance standards between financial statement audits and
sustainability assurance engagements described above are also likely to result in differences
in auditor liability across the two types of engagements. In particular, for a water report
assurance engagement, the auditor is likely to face reduced liability because the materiality
guidelines for sustainability assurance engagements are less clear and, under a vague speci-
fication of due care, an auditor is far less likely to be found negligent than when regula-
tions surrounding due care are clear (Schwartz 1998). Also, auditor liability requires
public scrutiny of audit effort (Zhang 2007), which is more evident for a financial state-
ment audit than a water report assurance engagement because of the high profile of regu-
latory agencies related to financial statement audits (e.g., Public Company Accounting
Oversight Board (PCAOB) in the United States; Canadian Public Accountability Board
(CPAB) in Canada; Australian Securities & Investments Commission (ASIC) in Aus-
tralia).
As liability concerns have been shown to influence auditor behavior (Schwartz 1998),
any differences in auditor liability are likely to result in differing materiality judgments.
When auditing standards are precise, it is clear what is expected of an auditor to avoid lit-
igation (Ewert 1999; Breuer 1999). Auditors who comply with auditing standards are per-
ceived to be exercising due care (Willekens and Simunic 2007), whereas noncompliance
with guidelines provides evidence of negligent behavior. Thus, when quantitative guidelines
inform auditors’ materiality assessments, auditors are likely to be more conservative than
when guidelines are vague or absent, with the result that there are greater incentives to
demonstrate due care by being more conservative when assessing materiality in a financial
statement audit than when assuring water reports. Furthermore, as standards become less
precise, audit effort may tend to decrease as there is less risk of being found negligent
(Ye and Simunic 2013) and, with less precise audit standards, there is more variation in
auditor judgments (Willekens and Simunic 2007).
The differences in auditing and assurance standards also likely affect the justification
process for waiving a potential audit difference. The need to justify decisions has been

shown to impact auditors’ judgments (e.g., Agoglia, Kida, and Hanno 2003; Peecher 1996;
Shankar and Tan 2006). There is a difference when auditing financial statements and when
assuring sustainability disclosures (including water reports) in who the auditor is likely to
have to justify the decision to book or waive a potential audit difference that is above 5
percent of base. These justifications are made during internal and external inspections
(Peecher, Solomon, and Trotman 2013) and to clients as part of the auditor–client negoti-
ation process (e.g., Hatfield et al. 2008; Sanchez, Agoglia, and Hatfield 2007; Trotman,
Wright, and Wright 2005). In the case of a financial statement audit, a decision to waive
an audit difference above 5 percent of base would need to be justified during internal
review processes (e.g., quality control reviews) and external inspections (e.g., PCAOB). As
the guidelines for both the selection of an appropriate base and percentages are vague for
sustainability (including water) materiality assessments, it is less likely that auditors will be
concerned about having to justify a decision to waive an audit difference above 5 percent
of base during internal review processes and external inspections. Justifications also need
to be made to the clients and, although booking a difference above 5 percent may need to
be justified to clients for both financial and water assurance, this should be much more
straight forward for a financial statement audit than a water accounting report assur-
ance engagement because auditing standards refer to 5 percent of base as a materiality
threshold.
Hypotheses
Based on these differences between audit and assurance standards, differences in liability,
and the need to justify judgments to different parties, a financial statement audit difference
is expected to be assessed as significantly more material than a water report audit differ-
ence of the same magnitude. Nevertheless, prior research in psychology and marketing has
shown that because people have limitations in their ability to process new information,
they use knowledge structures based on past experience to process new information
(Mathieu, Goodwin, Heffner, Salas, and Cannon-Bowers 2000; Palmer and Pickett 1999).
Experience brings the opportunity to develop mental models which aid decision making
(Hammersley 2006) and, as a consequence of their training and past experiences, auditors
bring to each engagement a mental model of the range of factors that impact their materi-
ality assessments. These mental models and audit approaches can differ when working in
different contexts (Free et al. 2009; Ng and Tan 2007; O’Dwyer 2011; O’Dwyer et al.
2011). When conducting an audit in an unfamiliar setting (such as assuring water reports),
auditors will rely on their previous experience (auditing financial statements) and thus
may rely heavily on heuristics, such as the 5 percent threshold often used in financial state-
ment audits, when assessing the materiality in a sustainability engagement. This could lead
to a reduction in the extent of differences between financial statement and water report
assurance materiality assessments and even an expectation that materiality is assessed simi-
larly across the two types of engagements, adding tension to our first hypothesis:
Hypothesis 1. A financial statement audit difference is expected to be assessed as signifi-

cantly more material than a water report audit difference of the same magnitude.
Prior research on financial statement audits indicates that materiality assessments and
consequent book/waive decisions of quantitatively immaterial audit differences are affected
by qualitative factors. Examples of such qualitative factors include the nature of an audit
difference (Tuttle, Coller, and Plumlee 2002), the subjectivity of an audit difference (Braun
2001), the impact on a client’s ability to meet analyst forecasts (Ng and Tan 2007), the
impact of the difference on a client’s ability to meet various earnings thresholds such as a

client’s ability to report positive earnings (Ng 2007), and the type of accountability pres-
sure (DeZoort, Harrison, and Taylor 2006).
For financial statement audits when the audit difference is below 5 percent, the pres-
ence of qualitative factors would make the decision to waive an audit difference more diffi-
cult to justify to internal and external parties. However, where an audit difference is above
5 percent (and therefore probably already considered material), the presence/absence of
qualitative factors are expected to at most have an amplifying effect on materiality judg-
ments in a financial statement audit.
For assurance of a water report, the same differences compared to a financial state-
ment audit that lead to Hypothesis 1 also make qualitative factors more relevant in this
context. First, there are less clear guidelines on percentages and bases to use when assess-
ing the materiality of audit differences (AUASB 2012), making quantitative guidance less
informative. In the case of water, the justification to book or waive audit differences is
likely to result in differences in opinion on what is the relevant percentage and what is the
relevant base to use in assessing its materiality. Second, particularly in the absence of a
breach of contract, auditor liability is likely to be lower for a water assurance engagement
than a financial statement audit. This would be the case because of the less precise stan-
dards, as noted above, making it less likely for the auditor to be found negligent, and less
of an enforcement mechanism in place to monitor misreporting of water usage compared
to the contents of financial statements (e.g., PCAOB, CPAB, ASIC). Thus, qualitative fac-
tors are expected to be more relevant and, as such, to have a greater effect on water report
materiality assessments than on financial statement materiality assessments where auditors
are expected to be mindful of the impact of an audit difference on key thresholds (ISA
320) irrespective of any qualitative factors.
We examine two important qualitative factors: breach of contract and the presence of
an affected community group. With respect to breach of contract, companies can borrow
funds with debt covenants attached; such agreements place certain limits on company
operations, for example, requiring their debt-to-equity level remain below a threshold or
maintaining their earnings per share above a particular level. Companies can also enter
into licensing agreements with water rights attached (Minerals Council of Australia 2006;
WASB 2012) to secure water to meet their production needs. Under such agreements com-
panies are entitled to withdraw a capped amount of water each year.6 In both of these sit-
uations, a breach of contract would be considered a qualitative factor (ISA 320; ISAE
3000) and would be expected to impact an auditor’s materiality judgment. Specifically,
when an audit difference places a client at risk of breaching a contract (for example, a
debt covenant or a licensing agreement), an audit difference is likely to be assessed as
more material than in the absence of such a risk. Notwithstanding, because of the differ-
ences in audit and assurance standards, in potential liabilities, and in the need for justifica-
tion, we expect this risk of breaching a contract to have a greater impact on water report
materiality assessments than financial statement materiality assessments when the audit
difference is greater than 5 percent and less than 10 percent of the relevant base. Given
the common use of 5 percent of net profit before tax as the materiality threshold for finan-
cial statements (Eilifsen and Messier 2013), many auditors will decide that an audit differ-
ence of this magnitude is material when auditing financial statements regardless of the risk
of breaching a contract, thus limiting the potential impact for the financial statement
materiality assessment but not the water report materiality assessment. In the presence of
6. While the penalties for breaching water licensing agreements in Australia can vary between states, under
the Water Management Act (Department of Primary Industries 2012) penalties are up to A$2.2 million
and/or a prison sentence.

a risk of breaching a contract, auditors are likely to assess the materiality of the audit dif-
ference for the water case closer to that for the financial case.
Hypothesis 2. The difference between financial statement and water report materiality
assessments is expected to be greater when there is no risk of breaching a contract
than when there is a risk of breaching a contract.
With respect to the presence of an affected community group, we again expect the
impact to be greater for water report materiality assessments than for financial statement
materiality assessments. For financial statement audits, materiality judgments are based on
a consideration of the common financial information needs of users as a group when
meeting the needs of investors will also meet the needs of other users (ISA 320.2). This
suggests that the presence of a community group would be unlikely to impact materiality
judgments when auditing financial statements. However, Moser and Martin (2012) suggest
that sustainability disclosure choices are driven by both investors and noninvestors. We
suggest both groups would be considered by auditors when assuring sustainability (water)
reports because public scrutiny increases auditor liability (Zhang 2007).
Consistent with this view, ISAE 3000 takes a broader approach to users than that in
ISA 320 by including substantial references to “intended users,” recognizing that “there
may be intended users other than those to whom the assurance report is addressed” (ISAE
3000.A16). ISAE 3000.A86 also notes “misstatements . . . are considered material if they
. . . could reasonably be expected to influence relevant decisions of intended users.” Thus,
we expect that the difference between financial statement and water report materiality
assessments to be greater when there is no community impact than when there is a com-
munity impact.
Hypothesis 3. The difference between financial statement and water report materiality
assessments is expected to be greater in the absence of a community group than in
the presence of a community group.
In the absence of well-defined quantitative benchmarks when assessing materiality for

sustainability (water) audits, auditors are expected to assess materiality of an audit differ-
ence the lowest when there is no risk of breaching a contract (licensing agreement) and no
community impact. Auditors are expected to anchor on qualitative factors, such as the
consequences of booking an audit difference, on a client’s ability to remain within the
terms of a contract (licensing agreement) or the impact on a local community, to a greater
extent when making materiality assessments for water report audits than when making
materiality assessments for financial statement audits. Furthermore, we expect that in the
absence of both a licensing agreement and a community group, auditors have very limited
guidance for their water materiality judgments, thus maximizing the difference between
water and financial materiality assessments. Consequently, the gap between the breach
and no breach treatments is expected to be greater in the absence of a community group
than in the presence of a community group, and the gap between community and no
community treatments is expected to be greater in the absence of a risk of breaching a
contract than in the presence of such a risk.
Hypothesis 4. The risk of breaching a contract is expected to have a greater effect on the
difference between financial statement and water report materiality assessments in
the absence of a community group than in the presence of a community group.

Hypothesis 5. The community impact is expected to have a greater effect on the differ-
ence between financial statement and water report materiality assessments when
there is no risk of breaching a contract than when there is a risk of breaching a con-
tract.
3. Research design
Participants
Eighty-two auditors from three of the Big 4 accounting firms took part in this study.7 Par-
ticipants comprised 48 managers and 34 seniors with an average 5.2 years audit experience
(ranging from 1.5 to 15 years). Participants were assured confidentiality and were each
given a $50 gift voucher for taking part in this study. Fourteen participants had experience
in sustainability assurance.8 Partners at participating firms informed us that participants
have the knowledge to carry out the requested judgments for both cases.
The experiment was conducted in the offices of the participating firms. Participants
were invited to take part by a senior partner from each firm. The same researcher was
present for each experimental session ensuring consistency of instructions. Participants
were randomly allocated to one of the four treatments.
Experimental task
The experimental materials included two cases (a financial statement case and a water
case) for two different clients. The task used in the financial case was based upon mining
company financial statements. The task used in the water case was based upon the expo-
sure draft version of AWAS 1 (WASB 2012) and various water accounting publications
issued by the Minerals Council of Australia (2006, 2010). The independent variables are
the risk of breaching a contract (breach/no breach) and the presence of a community
group (presence/absence). These factors were chosen with reference to financial and water
accounting publications (AWAS 1; ISA 200; ISA 320; ISAE 3000; Minerals Council of
Australia 2006), financial and water disclosures by Australian mining companies, and ini-
tial discussions with audit partners regarding the types of events that are likely to be
important to auditors when auditing financial statements and when assuring water disclo-
sures. Specifically, the case materials were developed with input from audit partners at the
participating firms, with researchers meeting with one partner from each of the firms on
between two and four occasions.
After reading an introductory statement, participants completed the two cases and
then the exit questions (manipulation checks and demographic details).9 Each case
included background information about a client, a newspaper article (which provided facts
about the relationship between the client and the local community), client disclosures
7. An ANCOVA with audit firm as a covariate was run for differences in participant materiality assessments
for the financial and water cases. Between-firm differences are not significant alone or when interacting with
treatment variables (p > 0.6). ANOVAs with level (manager or senior) and then years of audit experience
as covariates were run for differences in participant materiality assessments for the financial and water
cases. Level (manager or senior) (p > 0.6) and years of audit experience (p > 0.4) are not significant alone
or when interacting with treatment variables.
8. An ANCOVA with sustainability experience as a covariate was run for differences in participant materiality
assessments for the financial and water cases. Sustainability experience is not significant alone or when
interacting with treatment variables (p > 0.2).
9. The cases were in two separate envelopes marked A and B. Participants were asked to complete the case
contained in envelope A first and then the case contained in envelope B, without reference to the case in
envelope A. Case order was randomized between subjects. There were no order effects for the financial case
(t = 0.105; p = 0.917) or the water case (t = 0.809; p = 0.421). Exit questions were in a separate envelope
marked C.

(excerpts of the client’s financial statement or sustainability report), information on the

potential breach of contract, and a description of an audit difference. The background
information, client disclosures, and audit differences were held constant between partici-
pants.
Across all treatments and cases, the audit difference was 6.6 percent of the relevant
base. In the financial case, the base was profit before tax10 and, in the water case, the base
was fresh water withdrawn and used in production. As assurance standards (ISAE 3000)
and prior academic literature do not specify a base for water differences, the base was
selected following consultation with audit partners while developing the case. It was
important that the percentage chosen not be greater than 10 percent of the relevant bases,
otherwise it is likely that all judgments would indicate that the amount was material. If
the amounts were less than 5 percent of the relevant bases, there was a risk that the water
audit difference would be considered equally immaterial in all treatments. We chose a
materiality level in the lower part of the 5 percent to 10 percent range as it was the most
likely range where qualitative factors are likely to be important in sustainability assurance
engagements (see Libby and Brown 2013 for a similar approach).11
In the financial case, a graph was provided for profit before tax over three years and
an excerpt of the income statement included sales, expenses, and profit before tax. In the
water case, a graph was provided for fresh water withdrawn and used over three years
and an excerpt of the sustainability report included details of fresh and poor water with-
drawn for production. Case facts emphasized the most likely bases for both net profit
before tax (financial case) and freshwater withdrawn and used (water case) by giving this
data for three consecutive years in graphical format. These two bases were also referred to
when discussing the debt covenant and the licensing agreement.
The background information was consistent across the clients in the two cases. Both
clients were described as being large listed mining companies, profitable, committed to
maximizing long-term shareholder wealth, with return on equity an important key perfor-
mance indicator. The partners from participating firms who advised on the design of the
cases suggested the importance of ensuring that both clients be described consistently as
being of a similar size (large), listed and in the same industry (mining), as these factors
impact auditor liability and as a consequence auditor materiality assessments. Participants
were asked to assume the role of an audit manager and were told that the companies had
been clients of their firm for the last three years.
Participants were asked to assess the materiality of the audit difference described in
the case. Specifically, participants were asked whether failure to correct the audit differ-
ence would make the statement/report materially misstated. Participants were provided an
11 point scale marked “Definitely NOT materially misstated” at 0 and “Definitely materi-
ally misstated” at 10. This is our main dependent variable, used to test the hypotheses, as
it is a judgment auditors need to make on every engagement when an audit difference is
found. In addition, auditors would know that this is an issue that both internal reviewers
and inspectors focus on (ASIC 2014). It has an added advantage that both cases use the
same 11-point scale to assess an audit difference of the same magnitude, which allows
comparison across the two cases. In addition, participants were asked to indicate the max-
10. The most commonly used benchmark is 5 percent of profit before tax (Eilifsen and Messier 2013; Libby
and Brown 2013; Messier et al. 2005).
11. An audit difference between 5 percent and 10 percent is likely to be considerably material in a financial
statement context, where qualitative factors are unlikely to affect materiality assessments (because the
amount is above the commonly used threshold of 5 percent). For this reason, the financial case is used as
a control against which water materiality assessments are considered. Had we chosen an audit difference
that was considerably lower, say 2 percent, water materiality assessments would likely be considered imma-
terial regardless of most qualitative factors.

imum dollar (megaliter) amount of understatement of expenses (freshwater withdrawn)

that would be immaterial.12 The maximum threshold responses for each case are discussed
in the supplementary analysis section of this article.
Design
To test our hypotheses, a 2 9 2 9 2 design was used. Type of engagement was manipulated
at two levels within-subjects: financial and water. The risks of breaching a contract and
community impact were each manipulated at two levels between-subjects: present or
absent. Although the nature of the contract varied between the financial and water cases,
in the breach (no breach) version of the case materials, participants were told that the cli-
ents were at risk (not at risk) of breaching a contract if the audit difference was booked.
Specifically, where the client was at risk of breaching a contract in the financial case, par-
ticipants were told that the company took out a significant loan with a debt covenant
attached, one requirement of which was that the company meets an earnings-per-share tar-
get. Participants were told that by earning in excess of $205 million the client had met the
earnings-per-share target. The draft financial statements showed profits of $212 million.
Participants were then informed of an audit difference related to provisions for employee
entitlements and environmental rehabilitation, and as a result operating expenses were
understated by $14 million. They were then shown revised excerpts from the income state-
ment and graphs of profit before tax both with and without the audit adjustment.
Where the client was at risk of breaching a contract in the water case, participants
were told that the company has a licensing agreement with water rights attached. Accord-
ing to that agreement the company is entitled to withdraw up to 8,200 ML (megaliters) of
freshwater. The draft sustainability report showed freshwater withdrawn of 7,985 ML.
The audit difference related to the calibration of the meters used and the auditor con-
cluded that the freshwater withdrawn is understated by 530 ML. Again participants
receive excerpts from the sustainability report and graphs showing the freshwater with-
drawn with and without the audit adjustment.
For the breach treatment, the following information then followed the description of
the audit difference in the case materials for the financial (water) case: “If the financial
statements (sustainability report) are (is) adjusted for the audit difference the client will
breach their debt covenant (exceed their water entitlement).” For the nonbreach treatment
participants were provided the same information about the debt covenant and licensing
agreement except that the debt covenant specified earnings in excess of $180 million
(instead of $205 million as described above in the financial case) and the licensing agree-
ment specified an entitlement of 10,000 ML (instead of 8,200 ML as described above in
the water case). Following the description of the audit difference, participants in the non-
breach treatment were informed that booking the audit difference would still allow the cli-
ent to meet the target set in their debt covenant (financial case) and remain within their
water entitlement (water case).
For the community treatment, the community-present version of the case materials
included newspaper articles explaining that a local community is impacted by client activi-
ties. Newspaper clippings used strong language to make the strength of community impact
apparent to participants. In the financial case, the newspaper article referred to the reli-
ance of the local community on jobs provided by the mine owned by the company. In the
water case, the newspaper article referred to a meeting of local farmers who claimed that
the company was responsible for the withdrawal of excess freshwater for use in its mining
12. These judgments were requested consistent with prior experiments on auditor–client negotiations on finan-
cial statements (see Brown and Wright 2008 for a review) where it is common to ask participants for the
dollar threshold where a write-down would not be required.

activities, depriving farmers of this precious resource. Participants were told that the meet-
ing was organized to raise public awareness of the amount of water withdrawn and used
by the mine owned by the company. Both articles include quotations from locals who
were angry with the mines and their activities. The community-absent version of the case
materials included newspaper articles explaining that there was minimal local community
impact from the client’s operations.
4. Results
Manipulation checks
After completing the cases, participants answered four manipulation checks. Two of the
questions related to the financial statement case and the other two to the water case. Each
set of questions asked participants about whether there was a community impact or not,
and whether booking the audit difference would breach a contract. The wording used in
the manipulation check questions mirrored the wording used in the case materials. Eighty-
six auditors completed the experimental materials. Four failed a manipulation check ques-
tion (three from the breach/no community treatment and one from the no breach/no com-
munity treatment) and were removed from the analysis. The results presented in the article
are for the 82 participants who correctly answered for all four manipulation checks. There
is no difference in the statistical conclusions if the four participants who failed a manipula-
tion check question are included.
Tests of Hypotheses
Descriptive statistics are included in Table 1. The table includes details of overall partici-
pant materiality assessments on an 11-point scale ranging from 0 to 10 with higher scores
indicating higher likelihood of material misstatement (Overall), which are broken down by
case type, financial and water, followed by the difference in the financial and water case
means for the breach and community impact treatments. Figure 1, panel A includes a
graph of these differences in participant materiality assessments. The results for the
2 9 2 9 2 ANOVA with assessment of materiality as the dependent variable is shown in
Table 2, panel A.
Hypothesis 1 predicts that a financial statement audit difference will be assessed as sig-
nificantly more material than a water report audit difference of the same magnitude. The
descriptive data in Table 1 show that, in each cell, participants assessed the materiality of
the audit difference higher for the financial case than for the water case. Hypothesis 1 is
supported by the significant main effect for type of engagement (F = 8.446, p = 0.005)
(Table 2, panel A). We conduct Levene’s test for variance equality for the materiality
assessments for the financial and the water case separately and we find that the variance is
higher for the water case (F = 3.064; p = 0.033, two-tailed) than for the financial case
(F = 0.202; p = 0.894, two-tailed). This result is consistent with the view that when audit
standards are less precise there is greater variation in auditor judgments (Willekens and
Simunic 2007). A Wilcoxon signed rank test of the median difference between the financial
and water materiality assessments further supports Hypothesis 1 that the financial and
water materiality assessments are significantly different (p = 0.002, one-tailed).
Hypothesis 2 predicts that the difference between financial statement and water report
materiality assessments is greater when there is no risk of breaching a contract than when
there is a risk of breaching a contract. Table 2, panel A indicates that the interaction
between type of engagement and breach is significant (F = 4.033, p = 0.048), but to for-
mally test Hypothesis 2, a planned contrast is applied to the within-subject differences in
materiality assessments between the financial and water cases. Specifically, the planned
contrast testing Hypothesis 2 in Table 2, panel B compares the within-subject differences

564
TABLE 1
Descriptive statistics for materiality assessments [Mean (SD)*,†]
Community No community Community versus no community
Overall Financial Water Difference Overall Financial Water Difference Financial Water Difference
Breach 7.91 8.04 7.78 0.26 8.08 8.22 7.94 0.28 t = 0.27 t = 0.20 t = 0.02

(2.09) (2.34) (1.86) (3.05) (2.10) (1.95) (2.28) (2.32) p = 0.79 p = 0.84 p = 0.98
Cell 1 (n = 23) Cell 2 (n = 18)
No Breach 7.29 7.81 6.76 1.05 6.80 7.75 5.85 1.90 t = 0.90 t = 1.17 t = 1.01
(2.62) (2.20) (2.93) (2.33) (2.55) (1.92) (2.79) (2.95) p = 0.93 p = 0.25 p = 0.32
Cell 3 (n = 21) Cell 4 (n = 20)
Contemporary Accounting Research
Breach versus t = 0.36 t = 1.36 t = 0.96 t = 0.68 t = 2.58 t = 1.85

No Breach p = 0.72 p = 0.18 p = 0.34 p = 0.50 p = 0.01 p = 0.07
Notes:
* All results are two-tail.
†
In the breach treatment, the differences between the materiality assessments for the financial and water cases are not significantly different from zero
(community treatment: mean = 0.26, t = 0.41, p = 0.69; no community treatment: mean = 0.28, t = 0.51, p = 0.62). In the no breach treatment, the
differences between materiality assessments are significantly different from zero (community treatment: mean = 1.05, t = 2.06, p = 0.05; no
community treatment: mean = 1.90, t = 2.88, p = 0.01).
Materiality assessments are on an 11 point scale marked “Definitely NOT materially misstated” at 0 and “Definitely materially misstated” at 10.
Overall = mean materiality assessment across both cases; Financial = mean materiality assessment for the financial case; Water = mean materiality
assessment for the water case; Difference = difference in the mean materiality assessments: financial case minus water case; Breach = risk of
breaching contract present; No Breach = risk of breaching contract absent; Community = community impact present; No Community = community
impact absent.
Figure 1 Materiality assessments. (A) Difference in materiality assessments. (B) Financial case
materiality assessments. (C) Water case materiality assessments
A
2 1.90
1.8
1.6
Difference in Materiality 1.4
Assessments 1.05
1.2
1 Breach
0.8 No Breach
0.6
0.4 0.26 0.28
0.2
0
Community No Community
B
10
9
Materiality Assessments
8.22
8.04
8
7.81 7.75 Breach
7 No Breach
5
C
10
9
Materiality Assessments
7.94
7.78
8
Breach
7 6.76 No Breach
5.85
6
5
Notes:
Panel A: Difference in materiality assessments = financial case mean materiality assessment minus
water case mean materiality assessment. Panels B and C: Materiality assessments are on an
11-point scale marked “Definitely NOT materially misstated” at 0 and “Definitely
materially misstated” at 10.
All data points are from the descriptive statistics presented in Table 1.
Breach = risk of breaching contract present; No Breach = risk of breaching contract absent;
Community = community impact present; No Community = community impact absent.

TABLE 2
ANOVA and planned contrasts for materiality assessments
Panel A: ANOVA for materiality assessments
Source SS df MS F p
Main effects
Within-subjects
Type of engagement 30.902 1 30.902 8.446 0.005
Between-subjects
Breach 37.128 1 37.128 5.238 0.025
Community 1.012 1 1.012 0.143 0.707
Interactions
Breach 9 Community 4.377 1 4.377 0.617 0.434
Type of engagement 9 Breach 14.755 1 14.755 4.033 0.048
Type of engagement 9 Community 1.921 1 1.921 0.525 0.471
Type of engagement 9 Breach 9 Community 1.775 1 1.775 0.485 0.488
Error 285.399 78 3.659
Panel B: Planned contrasts for Hypothesis 2: Effect of breach
Contrasts
[Cell 1, Cell 2, Cell 3, Cell 4] t p (one-tailed)
Hypothesis 2: Difference (financial minus water) [ 1, 1, 1, 1] 2.008 0.024

Supplemental:
Financial case [ 1, 1, 1, 1] 0.748 0.228
Water case [ 1, 1, 1, 1] 2.816 0.003
Panel C: Planned contrasts for Hypothesis 3: Effect of community
Contrasts
Hypothesis 3: Difference (financial minus water) [ 1, 1, 1, 1] 0.725 0.235

Supplemental:
Financial case [ 1, 1, 1, 1] 0.126 0.450
Water case [ 1, 1, 1, 1] 0.678 0.250
Panel D: Planned contrasts for Hypotheses 4 and 5: Interactions
Contrasts
Hypothesis 4: Difference (financial minus water)

ordinal interaction for breach [ 2, 2, 1, 3] 2.217 0.015
Hypothesis 5: Difference (financial minus water)
ordinal interaction for community [ 2, 1, 2, 3] 1.332 0.093
Notes:
The contrasts are coded across the four cells, where: Cell 1 = breach, community (risk of breaching
contract present and community impact present); Cell 2 = breach, no community (risk of
breaching contract present and community impact absent); Cell 3 = no breach, community
(risk of breaching contract absent and community impact present); Cell 4 = no breach, no
community (risk of breaching contract absent and community impact absent).

in the breach cells with the no breach cells. The contrast is significant (t = 2.008,
p = 0.024) supporting Hypothesis 2.
Table 2, panel B also includes separate contrasts for the financial and water cases
(depicted in Figure 1, panels B and C). For the financial case, the breach/community and
breach/no community mean materiality assessments (8.04 and 8.22, respectively; Table 1)
are not significantly different to the no breach/community and no breach/no community
mean materiality assessments (7.81 and 7.75, respectively; Table 1) (t = 0.748, p = 0.228;
Table 2, panel B). For the water case, the breach/community and breach/no community
mean materiality assessments (7.78 and 7.94, respectively; Table 1) are significantly differ-
ent to the no breach/community and no breach/no community mean materiality assess-
ments (6.76 and 5.85, respectively; Table 1) (t = 2.816, p = 0.003; Table 2, panel B). This
analysis provides additional support for Hypothesis 2.
Hypothesis 3 predicts that the difference between financial statement and water report
materiality assessments is greater in the absence of a community group than in the pres-
ence of a community group. The result of a planned contrast testing the within-subject dif-
ferences in materiality assessments between the financial and water cases when a
community effect is present or absent is not significant (t = 0.725, p = 0.235; Table 2,
panel C). Figure 1, panel A and the descriptive statistics presented in Table 1 indicate that
the within-subject differences in the materiality assessments are similar in the presence of a
breach treatment (solid line) and different in the absence of a breach treatment (dotted
line). However, while the slope of the dotted line suggests a community effect in the
absence of breach, the simple effect in Table 1 indicates that this effect is not significant
(t = 1.01, p = 0.32). Thus, Hypothesis 3 is not supported.
Hypothesis 4 predicts that the risk of breaching a contract will have a greater effect
on the within-subjects difference between financial statement and water report materiality
assessments in the absence of a community group than in the presence of a community
group. To test Hypothesis 4, we conduct a contrast test with the weights 2 in the
“breach + community” and “breach + no community” treatments, +1 in the “no
breach + community” treatment, and +3 in the “no breach + no community” treatment.
The contrast weights not only include a main effect for breach, but also incorporate the
specific interaction pattern between our manipulated factors (absence/presence of commu-
nity group).13 In line with our expectations, Figure 1, panel A shows that the gap between
the breach and no breach lines is greater in the absence of a community group than in the
presence of a community group. The result for the contrast [ 2, 2, 1, 3] support
Hypothesis 4 (t = 2.217, p = 0.015, one-tailed; Table 2, panel D). This result shows that in
addition to a significant main effect for breach, the breach effect is stronger in the absence
of a community impact than in its presence.
Hypothesis 5 predicts that the community impact will have a greater effect on the
difference between financial and water materiality assessments when there is no risk of
breaching a contract than when there is a risk of breaching a contract. To test Hypothe-
sis 5, we conduct a test with the weights 2 in the “breach + community” and the “no
breach + community” treatments and +1 in the “breach + no community” treatment and
+3 in the “no breach + no community” treatment. This contrast includes a main effect
for community and an interaction for risk of breaching a contract. The result for the
contrast [ 2, 1, 2, 3] is marginally significant (t = 1.332, p = 0.093, one-tailed) (Table 2,
panel D).
In both Hypotheses 4 and 5 the no breach/no community treatment is predicted to
have the greatest difference in materiality assessments. We conduct an alternative contrast
13. This contrast provides a powerful test for an ordinal interaction (Buckless and Ravenscroft 1990; Rosnow
and Rosenthal 1995).

TABLE 3
Descriptive statistics and ANOVA for materiality threshold: Financial case
Panel A: Descriptive statistics for the materiality threshold ($million) for the financial case [mean
(SD)]
Breach 9.75 7.93 t = 1.07

(6.03) (3.73) p = 0.29
No Breach 11.35 10.64 t = 0.42
(6.59) (4.54) p = 0.68
Breach versus No Breach t = 0.98 t = 1.53
p = 0.33 p = 0.13
Panel B: ANOVA for the materiality threshold for the financial case
Source SS df MS F p
Breach 94.060 1 94.060 3.196 0.078

Community 32.564 1 32.564 1.107 0.296
Breach 9 Community 6.203 1 6.203 0.211 0.647
Error 2,295.415 78 29.428
Notes:
Materiality threshold is the maximum amount of understatement that participants would consider to
be immaterial.
scheme ( 1, 1, 1,+3) as a robustness test of both hypotheses. The result is significant

(t = 1.969, p = 0.026, one-tailed, not tabulated) and indicates that the difference in materi-
ality assessments in the no breach/no community treatment is significantly different to the
difference in materiality assessments in the other three cells. The simple effects for differ-
ences between the cells (Table 1) indicate that the only significant difference is between the
breach/no community and no breach/no community cells (t = 1.85, p = 0.07, two tailed).
5. Supplementary analysis
After assessing the materiality of each audit difference, participants were asked to indicate
the maximum amount of understatement that they would consider to be immaterial for
each of the two cases which represents the participant’s materiality thresholds. Because the
materiality thresholds for financial and water are on different scales (dollars and megali-
ters) and there is potentially some disagreement on what base should be used to determine
a water materiality threshold,14 we examine the financial and water materiality thresholds
separately and compare the results using the dollar and megaliter amounts indicated as
the basis for analysis. Table 3 contains the analysis for the financial case and Table 4
contains the analysis for the water case. In interpreting the means in Tables 3 and 4, it
14. Here we asked for an amount rather than asking for a percentage of a particular base. This numerical
judgment is likely to be considered as part of the determination of a negotiated write-down but unlikely to
be recorded in the workpapers. The relevant standard on materiality in sustainability reports, ISAE 3000,
is vague on what base and what percentage is appropriate. It refers to “the need to understand what fac-
tors might influence the decisions of the intended user” but no example is given in the standard of such a
base or percentage (IFAC 2005).

TABLE 4
Descriptive statistics and ANOVA for materiality threshold: Water case
Panel A: Descriptive statistics for the materiality threshold (megaliters) for the water case [mean
(SD)]
Breach 370.43 257.11 t = 1.53

(238.44) (117.35) p = 0.13
No Breach 396.05 412.50 t = 0.22
(293.96) (242.78) p = 0.82
Breach versus No Breach t = 0.36 t = 2.03
p = 0.72 p = 0.05
Panel B: ANOVA for the materiality threshold for the water case
Source SS df MS F p
Breach 166,614.455 1 166,614.455 2.999 0.087

Community 47,720.032 1 47,720.032 0.859 0.357
Breach 9 Community 85,643.997 1 85,643.997 1.542 0.218
Error 4,333,040.311 78 55,551.799
Notes:
Materiality threshold is the maximum amount of understatement that participants would consider to
be immaterial.
should be noted that a high score in Table 1 (whether “materially misstated”) will likely
be associated with a low score in Tables 3 and 4; that is, a higher materiality assessment
would be consistent with a lower materiality threshold, and vice versa.15
Table 3, panel A provides the mean materiality thresholds set by participants for the
financial case. Panel B shows the 2 9 2 between-subjects ANOVA with the breach/no
breach and community/no community treatments. There is a marginally significant main
effect for breach (F = 3.196, p = 0.078, two-tailed) with participants setting a lower mate-
riality threshold when there is a risk of breaching a contract than when there is no risk,
but no significant community effect (p = 0.296) or interaction (p = 0.647). This margin-
ally significant main effect for breach is inconsistent with the main analysis where there
was an insignificant breach effect for the financial case (see Table 2, panel B). This
inconsistency can be explained by differences in the task. When assessing the materiality
of an audit difference of 6.6 percent of net profit, auditors are less likely to respond to
the risk of breaching a contract because it is already over the 5 percent benchmark sug-
gested in audit standards. However, when setting a materiality threshold, it would likely
be considered as a qualitative factor. The contrast examined earlier [ 2, 2, 1, 3], which
tests both the main effect and the interaction, is not significant (t = 1.538, p = 0.13, two-
tailed, not tabulated). None of the simple effects included in panel A are significant
(p ≥ 0.1, two-tailed).
15. Correlations between materiality assessments and thresholds are negative and significant overall
(p = 0.000) and significant in each of the four treatments (p < 0.04).

Table 4 provides details of the analysis conducted for the water case. The ANOVA in
Table 4, panel B shows a marginally significant main effect for breach (F = 2.999,
p = 0.087, two-tailed) with participants setting a lower materiality threshold when there is
a risk of breaching a contract than when there is no risk. The contrast [ 2, 2, 1, 3] as
described above, is marginally significant (t = 1.699, p = 0.09, two-tailed not tabulated)
and the only significant simple effect is for breach in the absence of community (t = 2.03,
p = 0.05, two-tailed) (Table 4, panel A). Overall this indicates that participants set a lower
threshold when there is a risk of breaching a contract than when there is no risk of
breaching a contract and this breach effect is only significant in the no community treat-
ment.16
The pattern of results presented in Table 1 and Table 4 are somewhat different for the
water case. In both instances, the only significant simple effect is for breach in the absence
of community. However, in Table 1, this result is driven by the no breach/no community
cell while in Table 4 this result is driven by the breach/no community cell. To better
understand this difference, we arranged postexperiment interviews with two of the partners
(from two different Big 4 firms) who had provided input to designing the cases. One of
the authors held a face-to-face meeting with each of them and explained the results of our
study both verbally and diagrammatically. Partners were not surprised that auditors
assessed materiality higher for the financial case than for the water case as liability risk is
greater for a financial statement audit. Explanations referred to the consequences of get-
ting it wrong as being much greater and more visible for a financial audit. They referred
to scientific uncertainty when assuring water reports and the greater precision in audit
standards compared to sustainability assurance standards with respect to materiality
would result in greater variation between materiality judgments for the water report
engagement compared to the financial engagement. The partners indicated that the finding
that the lowest materiality assessment was for the no breach/no community treatment was
consistent with their expectations. However, when asked to speculate on why the material-
ity threshold was lowest in the absence of a community rather than in the presence of a
community for the water case, they suggested that when setting a materiality threshold in
the absence of a community, the focus is only on shareholders. With the effects on share-
holders becoming more salient, it may encourage greater conservatism where there is a
risk of breaching a contract, resulting in the lowest threshold in the breach/no community
treatment. Nevertheless, it is not clear why these effects would differ between the two
tasks. Further inspection of the data for the water case showed that the breach/no com-
munity treatment had the lowest variance (117.35) of the four cells (see Table 4, panel A)
(F = 4.698; p = 0.033, not tabulated). One reason for this is that the proportion of individ-
uals indicating a threshold consistent with the breach limit (i.e., setting a materiality
threshold at the amount where the breach would cut in) was higher for the breach/no
community treatment than the breach/community treatment (11 of 18 in cell 2 compared
to 8 of 23 in cell 1, v2 = 2.815; p = 0.09).
Libby and Brown (2013) in a study that examines materiality judgments for a financial
statement case find differences in their results between Likert scale materiality assessments
and an allowable error measure. They note that their study plus previous research and dis-
cussions with representatives of the major audit firms suggest the prominence of a thresh-
16. For completeness, we also convert each set of thresholds into a percentage (of profit before tax, or of
freshwater withdrawn and used) to apply a combined analysis (not tabulated), parallel in nature to the
ANOVA in Table 2, panel A. Consistent with the weaker results in Tables 3 and 4, we find that only the
breach main effect is significant (F = 5.013, p = 0.028). Both the main effect for type of engagement
(F = 0.228, p = 0.635) and the interaction between type of engagement and breach (F = 0.024, p = 0.876)
are no longer significant. Equivalent contrasts to those conducted in Table 2, panels B–D were not statisti-
cally significant (p > 0.37).

old of 5 percent of pre-tax income as the nominal quantitative benchmark and that smal-
ler errors require the consideration of qualitative factors. No such guidelines appear for
water reports. The fact that these task effects exist in both financial statement materiality
judgments where the differences are below 5 percent of a base (Libby and Brown 2013)
and in our study for sustainability reports, where the differences are above 5 percent of a
base, suggests the need for future research to examine these task differences. In fact, this
call for further research on task effects follows a long line of similar calls (e.g., Ashton
1990; Bonner 1994; Nelson and Tan 2005; Trotman 2005).
6. Discussion and conclusion

It is becoming more common for companies to report on and assure their sustainability
performance. Much of the research into sustainability reporting has focused on the nature
of the information provided and the contribution made by assurance to enhance the credi-
bility of disclosed information. Despite the importance of judgment in these sustainability
assurance engagements, there has been no research to date on how auditor judgments dif-
fer when assuring sustainability rather than financial information. Similarly, research into
auditor materiality assessments, a key component of every audit, has focused on financial
statement audits, with no research to date on how auditor materiality assessments are
impacted by qualitative factors when assuring sustainability information.
The aim of our study was to better understand auditor materiality judgments when
assuring sustainability (water) information. In particular, we focus on the treatments
under which financial and water materiality assessments are expected to be similar or dif-
ferent, and the way qualitative factors are expected to impact materiality assessments dif-
ferently between financial and water assurance. Understanding the factors that impact
materiality judgments is important as these factors can ultimately affect the reliability of
reported numbers (Libby and Brown 2013).
While previous research has identified that qualitative factors affect materiality judg-
ments on amounts that are quantitatively immaterial in a financial statement context (e.g.,
Ng 2007; Ng and Tan 2007), in this article, we consider amounts above 5 percent of profit
before tax and quantities of water above 5 percent of a relevant base. We compare finan-
cial statement and sustainability (water report) materiality assessments and find that when
an audit difference is between 5 percent and 10 percent of a base, auditors assess material-
ity higher for a financial case than for a water case. This difference is significantly greater
when there is no risk of breaching a contract than when there is a risk of breaching a con-
tract. While our results were not significant for the community main effect, we find an
interaction between the breach and community treatments. We find that the risk of
breaching a contract has a greater effect on the difference between financial statement and
water report materiality assessments in the absence of a community group than in the
presence of a community group, and that community impact has a greater effect on the
difference between financial statement and water report materiality assessments when there
is no risk of breaching a contract than when there is a risk of breaching a contract.
Our study has a number of limitations which affect the generalizability of the results.
First, all our participants had financial statement audit experience, but few had experience
with sustainability assurance. This allowed us to consider materiality judgments in a new
sustainability assurance area where experience is low. As new assurance services such as
water report assurance evolve within the firms, new expertise and new guidelines are likely
to appear. While our results are robust to controlling for sustainability assurance experi-
ence, interesting insights could be gained from longitudinal studies that consider how
materiality judgments change as financial statement auditors gain more experience in
sustainability assurance and as assurers without an accounting background obtain training
and experience in audit procedures.

Second, in consultation with audit partners, we chose an audit difference of 6.6 per-
cent of two bases (net profit before tax and freshwater withdrawn) and a form of sustain-
ability reporting which involves reporting of a nonfinancial quantitative amount (volume
of freshwater used). The choice of 6.6 percent was in the range where qualitative factors
were likely to be important in the water case. However, as discussed earlier, there are
many other types of sustainability disclosures including rates of occurrence (e.g., injuries),
percentages (percentage of suppliers that have met particular requirements; percentages of
employees trained in anticorruption) and number of incidents (e.g., work-related deaths).
Even with those disclosures requiring quantitative estimates (e.g., GHG emissions, energy
usage, water, waste disposal, etc.), the quantitative differences are not additive. Interesting
future research questions relate to both how materiality judgments will vary with the nat-
ure of the sustainability disclosures and what users of the assurance reports would con-
sider material for different types of disclosures. Importantly, while differences can be
aggregated in the audit of financial statements, future research needs to consider how dif-
ferences are aggregated across different sustainability disclosures to make an overall assess-
ment of materiality for the sustainability report.
Our study has considered materiality judgments in both financial statement audits and
sustainability assurance. We suggest that many other audit judgments will vary between
the two types of engagements because of task differences and differences in those perform-
ing the tasks. For example, sustainability assurance teams include individuals who are
auditors or subject-matter experts (e.g., engineers, geologists, environmental scientists).
Compared to those with a financial statement audit background, subject-matter experts
have different educations, training, experience, and likely levels of professional skepticism
(Trotman and Trotman 2015). Nelson and Tan (2005) point to the importance of interper-
sonal interactions to the audit judgment literature, and we suggest the multidisciplinary
teams in sustainability assurance engagements have the potential for both additional pro-
cess gains and process losses. The structure of the review process in these multidisciplinary
sustainability teams is also likely to vary. There will also be different accountability rela-
tionships and different parties to auditor–client negotiations (e.g., sustainability managers,
nonaccounting assurance providers). Such differences provide substantial opportunities for
future research.
References
Agoglia, C. P., T. Kida, and D. M. Hanno. 2003. The effects of alternative justification memos on
the judgments of audit reviewees and reviewers. Journal of Accounting Research 41 (1): 33–46.
American Institute of CPAs (AICPA). 2006. Audit risk and materiality in conducting an audit (SAS
107). New York: Financial Reporting Center.
American Institute of CPAs (AICPA). 2014. Substantive differences between the International Stan-
dards on Auditing and Generally Accepted Auditing Standards. New York: Financial Reporting
Center.
Ashton, R. H. 1990. Pressure and performance in accounting decision settings: Paradoxical effects of
incentives, feedback and justification. Journal of Accounting Research 28 (Supplement): 148–80.
Auditing and Assurance Standards Board (AUASB). 2012. Assurance Engagements on General
Purpose Water Accounting Reports (AWAS 2). Melbourne, Australia: AUASB.
Auditing and Assurance Standards Board (AUASB). 2014. Assurance Engagements on General Pur-
pose Water Accounting Reports (ASAE 3610 and AWAS 2). Melbourne, Australia: AUASB.
Australian Securities & Investments Commission (ASIC). 2014. Audit inspection program report for
2012–13. Report 397. Sydney, Australia.
Bonner, S. E. 1994. A model of the effects of audit task complexity. Accounting, Organizations and
Society 19 (3): 213–34.

Braun, K. W. 2001. The disposition of audit-detected misstatements: An examination of risk and

reward factors and aggregation effects. Contemporary Accounting Research 18 (1): 71–99.
Breuer, W. 1999. Auditor liability and the precision of auditing standards: Comment. Journal of
Institutional and Theoretical Economics 155 (1): 207–13.
Brown, H. L., and A. M. Wright. 2008. Negotiation research in auditing. Accounting Horizons 22
(1): 91–109.
Buckless, F. A., and S. P. Ravenscroft. 1990. Contrast coding: A refinement of ANOVA in behav-
ioral analysis. The Accounting Review 65 (4): 933–45.
Canadian Institute of Chartered Accountants (CICA). 2009. The CICA’s guide to new CASs in
Canada. Toronto, ON: CICA.
Ceres. 2009. Water scarcity and climate change: Growing risks for businesses and investors. Boston,
MA: Ceres.
Ceres. 2010. The ripple effect: Water risk in the municipal bond market. Boston, MA: Ceres.
Clarkson, P. M., Y. Li, G. D. Richardson, and F. P. Vasvari. 2008. Revisiting the relation between
environmental performance and environmental disclosure: An empirical analysis. Accounting,
Organizations and Society 33 (4–5): 303–27.
Committee for Economic Development of Australia (CEDA). 2011. Crisis and opportunity: Lessons
of Australian water reform. The Australian Water Project, Volume 1. Melbourne, Australia:
CEDA.
Cooper, S. M., and D. L. Owen. 2007. Corporate social reporting and stakeholder accountability:
The missing link. Accounting, Organizations and Society 32 (7–8): 649–67.
Coram, P. J., G. S. Monroe, and D. R. Woodliff. 2009. The value of assurance on voluntary nonfinancial
disclosure: An experimental evaluation. Auditing: A Journal of Practice & Theory 28 (1): 137–51.
Department of Primary Industries. 2012. Compliance with NSW water management laws: Regulated
activities, offences and penalties. Sydney, Australia: NSW Office of Water.
DeZoort, T., P. Harrison, and M. Taylor. 2006. Accountability and auditors’ materiality judgments:
The effects of differential pressure strength on conservatism, variability, and effort. Accounting,
Organizations and Society 31 (4–5): 373–90.
Dhaliwal, D. S., S. Radhakrishnan, A. Tsang, and Y. G. Yang. 2012. Nonfinancial disclosure and
analyst forecast accuracy: International evidence on corporate social responsibility disclosure.
The Accounting Review 87 (3): 723–59.
Eilifsen, A., and W. F. Messier, Jr. 2013. Materiality guidance of the major auditing firms. Paper
presented at the International Symposium on Audit Research Conference.
Ernst & Young. 2010. Action amid uncertainty: The business response to climate change. UK: EYGM
Limited.
Ewert, R. 1999. Auditor liability and the precision of auditing standards. Journal of Institutional and
Theoretical Economics 155 (1): 181–206.
Free, C., S. E. Salterio, and T. Shearer. 2009. The construction of auditability: MBA rankings and
assurance in practice. Accounting, Organizations and Society 34 (1): 119–40.
Godfrey, J. M., and K. Chalmers (eds.). 2012. Water accounting: International approaches to policy
and decision-making. Cheltenham, UK: Edward Elgar Publishing Limited.
Hammersley, J. S. 2006. Pattern identification and industry-specialist auditors. The Accounting
Review 81 (2): 309–36.
Hatfield, R. C., C. P. Agoglia, and M. H. Sanchez. 2008. Client characteristics and the negotiation
tactics of auditors: Implications for financial reporting. Journal of Accounting Research 46 (5):
1183–207.
Hoekstra, A. Y., A. K. Chapagain, M. M. Aldaya, and M. M. Mekonnen. 2011. The water footprint
assessment manual: Setting the global standard. London, UK: Earthscan.
International Federation of Accountants (IFAC). 2009. Materiality in planning and performing an
audit. International Standard on Auditing 320 (ISA 320). New York, NY: IFAC.

Kim, Y., M. S. Park, and B. Wier. 2012. Is earnings quality associated with corporate social respon-
sibility? The Accounting Review 87 (3): 761–96.
KPMG International (KPMG). 2011. Corporate Sustainability: A progress report. UK: KPMG.
Libby, R. 1981. Accounting and human information processing: Theory and applications. Englewood
Cliffs, NJ: Prentice-Hall.
Libby, R., and T. Brown. 2013. Financial statement disaggregation decisions and auditors’ tolerance
for misstatement. The Accounting Review 88 (2): 641–65.
Libby, R., and W. R. Kinney, Jr. 2000. Does mandated audit communication reduce opportunistic
corrections to manage earnings to forecasts? The Accounting Review 75 (4): 383–404.
Mathieu, J. E., G. F. Goodwin, T. S. Heffner, E. Salas, and J. A. Cannon-Bowers. 2000. The influ-
ence of shared mental models on team process and performance. Journal of Applied Psychology
85 (2): 273–83.
Messier, W. F. Jr. 1983. The effect of experience and firm type on materiality/disclosure judgments.
Journal of Accounting Research 21 (2): 611–18.
Messier, W. F. Jr., N. Martinov-Bennie, and A. Eilifsen. 2005. A review and integration of empirical
research on materiality: Two decades later. Auditing: A Journal of Practice & Theory 24 (2):
153–87.
Minerals Council of Australia. 2006. Strategic water management in the minerals industry: A frame-
work. Forrest, ACT: Minerals Council of Australia.
Minerals Council of Australia. 2010. Water accounting framework for the minerals industry. Forrest,
ACT: Minerals Council of Australia.
Moroney, R., C. Windsor, and Y. T. Aw. 2012. Evidence of assurance enhancing the quality of vol-
untary environmental disclosures: An empirical analysis. Accounting and Finance 52 (3): 903–39.
Morrison, J., P. Schulte, and R. Schenck. 2010. Corporate water accounting: An analysis of methods
and tools for measuring water use and its impacts. Oakland, CA: Pacific Institute.
Moser, D. V., and P. R. Martin. 2012. A broader perspective on corporate social responsibility
research in accounting. The Accounting Review 87 (3): 797–806.
Nelson, M., and H. T. Tan. 2005. Judgment and decision making research in auditing: A task,
person, and interpersonal interaction perspective. Auditing: A Journal of Practice & Theory 24
(Supplement): 41–71.
Ng, T. B.-P. 2007. Auditors’ American Institute of Certified Public Accountants decisions on audit
differences that affect significant earnings thresholds. Auditing: A Journal of Practice & Theory
26 (1): 71–89.
Ng, T. B.-P., and H.-T. Tan. 2007. Effects of qualitative factor salience, expressed client concern,
and qualitative materiality thresholds on auditors’ audit adjustment decisions. Contemporary
Accounting Research 24 (4): 1171–92.
O’Dwyer, B. 2011. The case of sustainability assurance: Constructing a new assurance service.
Contemporary Accounting Research 28 (4): 1230–66.
O’Dwyer, B., D. Owen, and J. Unerman. 2011. Seeking legitimacy for new assurance forms: The
case of assurance on sustainability reporting. Accounting, Organizations and Society 36 (1):
31–52.
Palmer, T. B., and G. M. Pickett. 1999. The role of mental models in control theory: Understanding
cognitive factors influencing the behaviors of salespeople. Journal of Marketing Theory and
Practice 7 (1): 17–29.
Peecher, M. E. 1996. The influence of auditors’ justification processes on their decisions: A cognitive
model and experimental evidence. Journal of Accounting Research 34 (1): 125–40.
Peecher, M. E., I. Solomon, and K. T. Trotman. 2013. An accountability framework for financial
statement auditors and related research questions. Accounting, Organizations and Society 38 (8):
596–620.
Rosnow, R. L., and R. Rosenthal. 1995. “Some things you learn aren’t so”: Cohen’s paradox,
Asch’s paradigm, and the interpretation of interaction. Psychological Science 6 (1): 3–9.

Sanchez, M. H., C. P. Agoglia, and R. C. Hatfield. 2007. The effect of auditors’ use of a reciprocity-
based strategy on auditor-client negotiations. The Accounting Review 82 (1): 241–63.
Schwartz, R. 1998. Auditors’ liability, vague due care, and auditing standards. Review of Quantita-
tive Finance and Accounting 11 (2): 183–207.
Shankar, P. G., and H. T. Tan. 2006. Determinants of audit preparers’ workpaper justifications. The
Accounting Review 81 (2): 473–95.
Simnett, R., A. Vanstraelen, and W. F. Chua. 2009. Assurance on sustainability reports: An interna-
tional comparison. The Accounting Review 84 (3): 937–67.
Spicer, B. H. 1978. Investors, corporate social performance and information disclosure: An empirical
study. The Accounting Review 53 (1): 94–111.
Trotman, K. T. 2005. Discussion of judgment and decision making research in auditing: A task,
person, and interpersonal interaction perspective. Auditing: A Journal of Practice & Theory 24
(Supplement): 73–88.
Trotman, K. T., and G. W. Bradley. 1981. Associations between social responsibility disclosure and
characteristics of companies. Accounting, Organizations and Society 6 (4): 355–62.
Trotman, A. J., and K. T. Trotman. 2015. Internal audit’s role in GHG emissions and energy
reporting: Evidence from audit committees, senior accountants and internal auditors. Auditing:
A Journal of Practice & Theory 34 (1): 199–230.
Trotman, K. T., A. M. Wright, and S. Wright. 2005. Auditor negotiations: An examination of the
efficacy of intervention methods. The Accounting Review 80 (1): 349–67.
Tuttle, B., M. Coller, and R. D. Plumlee. 2002. The effect of misstatements on decisions of financial
statement users: An experimental investigation of auditor materiality thresholds. Auditing: A
Journal of Practice & Theory 21 (1): 11–27.
Van der Laan, G., H. Van Ees, and A. Van Witteloostuijn. 2008. Corporate social and financial per-
formance: An extended stakeholder theory, and empirical test with accounting measures. Jour-
nal of Business Ethics 79 (3): 299–310.
Water Accounting Standards Board (WASB). 2011. International water accounting: Current practice
and potential development. Melbourne, Australia: WASB.
Water Accounting Standards Board (WASB). 2012. Preparation and presentation of general purpose
water accounting reports. Australian Water Accounting Standard 1 (AWAS 1). Melbourne, Aus-
tralia: WASB.
Willekens, M., and D. A. Simunic. 2007. Precision in auditing standards: Effects on auditor and
director liability and the supply and demand for audit services. Accounting and Business
Research 37 (3): 217–32.
Ye, M., and D. A. Simunic. 2013. The economics of setting auditing standards. Contemporary
Accounting Research 30 (3): 1191–215.
Zhang, P. 2007. The impact of the public’s expectations of auditors on audit quality and auditing
standards compliance. Contemporary Accounting Research 24 (2): 631–54.

Differences in Auditors Materiality Assessments When Auditing Fi

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Differences in Auditors Materiality Assessments When Auditing Fi

Hochgeladen von

Copyright:

Verfügbare Formate

Diﬀerences in Auditors’ Materiality Assessments When Auditing

Financial Statements and Sustainability Reports*

ROBYN MORONEY, Monash University

KEN T. TROTMAN, UNSW Australia

Electronic copy available at: https://ssrn.com/abstract=2200753

CAR Vol. 33 No. 2 (Summer 2016)

Electronic copy available at: https://ssrn.com/abstract=2200753

and dynamics surrounding practitioners’ eﬀorts to operationalize sustainability assurance

CAR Vol. 33 No. 2 (Summer 2016)

Electronic copy available at: https://ssrn.com/abstract=2200753

standards (O’Dwyer 2011). By considering the judgments of experienced ﬁnancial state-

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

continuing operations is given as an example of a materiality calculation often used by

CAR Vol. 33 No. 2 (Summer 2016)

Hypothesis 1. A financial statement audit difference is expected to be assessed as signifi-

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

In the absence of well-deﬁned quantitative benchmarks when assessing materiality for

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

(excerpts of the client’s ﬁnancial statement or sustainability report), information on the

CAR Vol. 33 No. 2 (Summer 2016)

imum dollar (megaliter) amount of understatement of expenses (freshwater withdrawn)

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

Community No community Community versus no community

CAR Vol. 33 No. 2 (Summer 2016)

Breach versus t = 0.36 t = 1.36 t = 0.96 t = 0.68 t = 2.58 t = 1.85

CAR Vol. 33 No. 2 (Summer 2016)

Panel A: ANOVA for materiality assessments

Panel B: Planned contrasts for Hypothesis 2: Eﬀect of breach

Hypothesis 2: Diﬀerence (ﬁnancial minus water) [ 1, 1, 1, 1] 2.008 0.024

Hypothesis 3: Diﬀerence (ﬁnancial minus water) [ 1, 1, 1, 1] 0.725 0.235

Hypothesis 4: Diﬀerence (ﬁnancial minus water)

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

Community No community Community versus no community

Breach 9.75 7.93 t = 1.07

Breach 94.060 1 94.060 3.196 0.078

scheme ( 1, 1, 1,+3) as a robustness test of both hypotheses. The result is signiﬁcant

CAR Vol. 33 No. 2 (Summer 2016)

Community No community Community versus no community

Breach 370.43 257.11 t = 1.53

Breach 166,614.455 1 166,614.455 2.999 0.087

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

6. Discussion and conclusion

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

Braun, K. W. 2001. The disposition of audit-detected misstatements: An examination of risk and

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

CAR Vol. 33 No. 2 (Summer 2016)

Das könnte Ihnen auch gefallen