The assessment and integration of materiality and inherent risk: an analysis of major firms' audit practices

This study focuses on how inherent risk and materiality assessments are made and how they are integrated in the planning of audit testing. Both of these assessments are an integral part of the audit planning process under the current ‘audit risk model’.

The analysis of audit manuals, other relevant decision aids and interviews with the technical partner or manager from each of the ‘Big 6’ accounting firms in Australia provided the source of data for the study. The findings indicate a diversity in firms' approaches to adopting the overall risk model framework, the inherent risk and control risk concepts and the levels at which these are assessed. Similarly, although all the firms set an overall planning materiality, diversity exists in relation to the level of guidance and judgment involved, the actual guidelines used, and the utilization of additional materiality levels such as an account level materiality. The firms' practices of integrating materiality and inherent risk are also diverse and the linkage is generally implicit rather than explicit. These findings are significant in terms of potential efficiency and effectiveness implications between different firms' practices.