Abstract:

The trend toward deploying more frequent (continuous) audits motivates the study of materiality thresholds relative to these audits. The current study investigates whether auditors and investors use the same basis to compute materiality thresholds (net income, total assets, or pre-tax income) when continuous reports based on continuous audits are prepared/used to make investment decisions, or whether they base their materiality estimates on different bases. The study also examines whether the basis to compute materiality thresholds (traditionally net income) used by investors/users and auditors is the annual or the period (month, week, day, etc.) of the report net income. Also, the study examines the extent to which materiality threshold estimates of auditors and investors with respect to continuous reports generated by continuous audits will be congruent. Last, the study investigates whether the basis to compute materiality thresholds is a function of the subject matter being audited, and whether the congruency between investors and auditor’s materiality estimates is a function of the subject matter being audited. A 2 (periodic/continuous audits) x 2 (auditors/investors) x 3 (3 different subject matters) between-subjects experiment will be conducted to test these research questions.