Effects of Materiality Assessment on Internal Controls over Financial Reporting Maturity

Abstract

The paper investigates the effects of materiality assessment on Internal Controls over Financial Reporting (ICFR) Maturity. Based on private data collected from Italian listed companies, the paper aims to provide a unique score for assessing ICFR Maturity of a company and to assess the effect of quantitative and qualitative factors used to evaluate materiality. Specifically, it examines the processes used to identify significant entities, significant accounts and associating accounts with process. A Partial Least Squares (PLS) Path Modeling approach is used. Among quantitative factors, total assets, sales and earnings before taxation are the best accounting measures used by companies to select entities, while income statement value is more useful than the balance sheet in selecting significant accounts. This last activity is relatively more relevant that the others. Scoping results show: 1) the importance of identification of entities at group level; 2) multiple association accounts – processes is better than single association. Finally results show different effects on ICFR Maturity for the manufacturing and services industry and for the financial industry.

Econometric Model for Readjusting Significance Threshold Levels through Quick Audit Tests Used on Sustainable Companies

“…The concept of materiality, as far as the area of audit is concerned, is associated with the audit decision or judgment decision [11,[35][36][37][38], audit quality [39,40], earnings management [41][42][43][44], audit risk [45][46][47] and the importance of the client [48,49].…”

Conservatism in Materiality Judgements: The Effect of Auditor’s Sex and Culture<sup>1</sup>

“…While it is generally accepted that the auditor's determination of materiality threshold is a matter of professional judgment and thus inherently subjective, the literature on materiality decisions overlooks the effect of the auditors' personal characteristics on materiality decisions. The extant research in materiality judgements mainly focuses on the methods and measures used to calculate materiality and reveals that auditors do not treat materiality uniformly, with large discrepancies between thresholds applied in practice (Holstrum & Messier, 1982;Iselin & Iskandar, 1999;Chewning & Higgs, 2002;Messier, Martinov-Bennie, & Eilifsen, 2005;Azzopardi & Baldacchino, 2009;Vance, 2011;Azzali, Mazza, Fornaciari, & Trinchera, 2018).…”