Factors Affecting Auditors' Assessments of Planning Materiality

This study investigates the planning materiality values used by auditors in The Netherlands for a sample of engagements performed by Big 5 and non-Big 5 firms in 1998–99. We find that, consistent with archival evidence from KPMG in Elliott (1983), planning materiality is not a constant percentage of a base, but increases at a decreasing rate with client size. In addition, we find that planning materiality values increase with the quality of the client's control environment and the magnitude of the client's rate of return on assets, while decreasing with the complexity of the client. We also find that Big 5 firms use lower planning materiality values than non-Big 5 firms, ceteris paribus, which is consistent with the production of relatively higher audit quality levels by the Big 5. Finally, we find that auditors use lower materiality values in situations where earnings might be managed to show a small profit or a small loss.