An analysis of the relationship between accounting restatements and quantitative benchmarks of audit planning materiality

Purpose - The purpose of this paper is to investigate the relationship between the amounts obtained using professionally accepted quantitative benchmarks of audit planning materiality and the size of accounting misstatements corrected by financial statements restatements.Design methodology approach...

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Bibliographic Details
Published in:Review of accounting & finance 2008-08, Vol.7 (3), p.236-251
Main Authors: Chen, Hanmei, Pany, Kurt, Zhang, Jian
Format: Article
Language:English
Subjects:
Accounting
Accounting information
Audit risk
Auditing
Auditing standards
Auditors
Benchmarks
Failure
FASB statements
Financial restatements
Financial statements
Materiality
Net income
Retained earnings
SEC regulations
Studies
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Summary:Purpose - The purpose of this paper is to investigate the relationship between the amounts obtained using professionally accepted quantitative benchmarks of audit planning materiality and the size of accounting misstatements corrected by financial statements restatements.Design methodology approach - The paper uses a sample of 136 companies (237 company years) that have restated such financial statements and compare the amounts of the restatements with planning materiality benchmarks (rules of thumb) established to aid auditors in arriving at audit planning levels.Findings - It was found that, depending on the method of analysis selected and the materiality benchmark followed, as high as approximately 62 per cent of the restatements involve income levels less than the planning materiality level.Research limitations implications - The results lead to questions as to the appropriate relationship between the scope of audit procedures, which is in part determined by these quantitative materiality benchmarks, and subsequent financial statement restatements.Originality value - The issue addressed in this study is important because if audit planning levels for materiality are in excess of the amounts subsequently restated due to accounting misstatements, this might serve as an explanation for a number of recent restatements. Furthermore, it might suggest the need to consider decreasing acceptable materiality planning levels, thus resulting in a recalibration of the audit process.
ISSN:1475-7702
1758-7700
DOI:10.1108/14757700810898230