The impact of guidance levels and justification requirement on determination of auditors’ planning materiality

Abstract

The purpose of this study is to examine the impact of guidance levels and justification requirement on planning materiality determination of auditors. Determination overall materiality or materiality for planning is important for auditors as it is an initial step that affects the whole process of auditing. In addition, setting materiality for planning in practice varies among audit firms from implementing the structured guidance to leaving to professional judgment. Previous research has shown that structured guidance could mitigate cognitive constraints of human and improve efficiency and consistency but it could limit their scope of thinking process only to the scope the guidance provided. Therefore, this research would like to study the impact of providing and not providing structured guidance on materiality decision in the planning stage. Justification requirement has been suggested as a tool to improve judgment performance by reducing confirmation bias. Thus, this paper expects that the justification requirement can reduce the drawback effect of structured guidance by increasing effort of thinking before coming up with the underlying reason. This research is the case-based experiment using audit managers from Big audit firms in Thailand as the sample group. This study may be the first to provide evidence of the interaction effect of guidance and justification. The results indicate that the structured guidance could limit attention of auditors and thus weaken their risk awareness. Justification, as expected, can improve thinking effort of auditors and mitigate the bias from the structured guidance.