Materiality: An Inter-Industry Comparison of the Magnitudes and Stabilities of Various Quantitative Measures

During the last decade, professional standards have required that auditors make a preliminary judgment about materiality levels during the planning of audits. Since materiality is a consideration in planning the nature, timing and extent of audit procedures, audit planning decisions would be impacted by the materiality calculation methods used. In this paper, a number of rules of thumb which have been suggested as materiality calculations, and estimate and compare the magnitudes and variabilities that result from their use are summarized. The results of this study show that among the various rules of thumb for calculating materiality, sizable differences can occur depending upon the method and the industry. Since SAS No. 47 does not provide operational guidance to allow the selection of an appropriate planning materiality level, using rules of thumb may appeal to many. It would seem prudent for auditors to give careful thought to planning materiality decisions.