Do Approaching Deadlines Influence Auditors' Materiality Assessments?

Abstract

SUMMARY We conduct an experiment to investigate whether deadline pressure influences auditors' judgments regarding the materiality of identified errors (internal control deficiencies), as well as the sufficiency of audit evidence to test clients' remediation once a deficiency is identified. Additionally, we consider whether judgments are further affected if the audit firm caused the deadline pressure. We manipulate time deadline pressure (low versus high) and the cause of the deadline pressure (audit firm or not). Findings suggest an interactive effect of deadline pressure and source of delay. Auditors assess identified errors as less material when they are both under high deadline pressure and responsible for creating the pressure. Once the deadline passes, auditors' materiality assessments are the highest, indicating that both the incentive to avoid issuing an adverse opinion and deadline pressure are necessary to impact materiality judgments. Further, when responsible for creating deadline pressure, auditors are willing to sample fewer items and to tolerate more errors in their sample when testing client-remediated deficiencies. These findings provide insight on how deadline pressure impacts audit materiality decisions and complements prior research examining consequences of adverse opinions on the audit of internal controls over financial reporting.