Karen Ann Dwyer
PhD Thesis Title: Auditor planning judgements: Audit materiality thresholds and auditor risk assessments in expanded audit reports
Supervisor: Professor Niamh Brennan
Professor Richard Slack
Professor of Accounting
Durham University Business School
Professor Breda Sweeney
JE Cairns School of Business
National University of Ireland Galway.
This four-paper dissertation analyses the communication of two important auditor planning judgements: audit materiality thresholds and auditor risks assessments in expanded audit reports of FTSE-350 companies. The research examines how auditors communicate their auditor planning judgements in expanded audit reports and how informative auditor planning judgements are for assessing audit effort.
Paper 1 provides descriptive evidence on three aspects of audit materiality thresholds in expanded audit reports: (i) auditor benchmark choice and benchmark percentage rates; (ii) auditor non-GAAP benchmarks and exclusions in auditor non-GAAP benchmarks; and (iii) auditor rationales for their benchmark choices. The study finds that auditors choose a wide variety of benchmarks and apply a wide range of percentages to their chosen benchmarks. Moreover, the study finds that auditors use non-GAAP benchmarks extensively (49%). The findings indicate that auditors’ use of non-GAAP benchmarks may have audit quality implications because items that are material using auditor GAAP benchmarks may become immaterial using auditor non-GAAP benchmarks.
Paper 2 investigates whether audit effort is associated with audit materiality thresholds. The research finds a negative association between audit effort (as proxied by audit fees) and audit materiality thresholds. The study provides new evidence on the linkages between audit effort and underlying auditor benchmark choice. First, it reveals that audit effort is negatively associated with asset rather than profit benchmarks. Second, contrary to expectations, the study finds that audit effort is positively associated with auditors use of non-GAAP benchmarks. The findings for audit effort and auditor non-GAAP benchmarks indicate that auditors spend more time on their audits when there are unusual events (e.g., restructuring charge).
Paper 3 provides descriptive evidence on two aspects of auditor risk assessments in expanded audit reports: (i) number of auditor-identified risks; and (ii) type of auditor-identified risks. The study finds that auditors identify on average three risks (with a minimum/maximum ranging from one to nine risks). The most common risks auditors identify are revenue (17%), impairment of intangibles (12%), impairment of other assets (12%) and taxation (10%). The research finds that auditor-identified risks and audit committee-identified risks are similar (80% similar). Few auditors rank the importance of their risks in their audit reports. Standard setters should require auditors to rank the importance of their risks in their audit reports.
Paper 4 investigates whether audit effort is associated with auditor risk assessments. The research finds a positive association between audit effort (as proxied by audit fees) and the number of auditor-identified risks. The study also provides new evidence on the linkages between audit effort and the type of auditor-identified risks. The findings suggest that audit effort is positively associated with: (i) impairment of intangibles; (ii) taxation; (iii) pensions; and (iv) entity-level risks. In contrast, the findings suggest that audit effort is negatively associated with: (i) revenue (i.e., income); and (ii) financial-asset risks. The results indicate that auditors spend more/less time on their audits with different types of auditor-identified risks.
Overall, the dissertation contributes to the literature by providing novel evidence on how audit effort is associated with auditor GAAP/non-GAAP benchmarks and auditor-identified risks and, consequently, audit quality. The concluding chapter interprets the findings at a higher level using a transparency theoretical lens. The interpretation suggests that expanded audit reports may not have met the regulator objective to provide greater transparency about the audit.
Key words Auditor planning judgements, Audit materiality thresholds, Auditor risk assessments, Expanded audit reports, Auditor GAAP/non-GAAP benchmarks, Auditor-identified risks