Abstract

To improve the usefulness of audit opinions, on 23 March 2021, the China Securities Regulatory Commission mandated that auditors disclose overall quantitative materiality of consolidated financial statements in special explanations of modified audit opinions. This paper selects Chinese A-share companies issued with modified audit opinions for the period of 2020–2022 as the research sample and analyzes the assessment of materiality in audit practice and the informativeness of audit materiality. Our findings are as follows. (1) The most commonly used bases for materiality by auditors are profit and income, with considerable differences in the percentages applied to the different bases and variations even within the same base. (2) The higher the materiality amount, the poorer the audit quality. This negative correlation is mainly observed in scenarios where the audited companies engage in downward earnings management and where the competency of audit firms or auditors is relatively low. (3) Companies that disclose quantitative materiality in the special explanations of modified audit opinions have a lower earnings response coefficient than companies that do not disclose audit materiality. This research sheds light on the “black box” of the audit process and verifies the information value of audit materiality. The conclusions are of significant value to auditing standard-setters, investors and regulators.

Introduction

Materiality is the magnitude of the impact of audit errors on the audit client’s decision making, which is one of the fundamental concepts of auditing and is utilized throughout the audit process ( Christensen et al., 2020 ). In planning and performing an audit, an auditor is required to make judgments about materiality to provide a basis for assessing the risks of material misstatement and preparing for further audit procedures. They must also apply materiality when evaluating the impacts of identified audit misstatements and uncorrected misstatements on financial statements. Therefore, materiality directly determines the quality of the audit. However, due to data limitations, how auditors in China establish materiality has remained a “black box.”

On 9 March 2021, the China Securities Regulatory Commission (CSRC) issued its “Guidelines for the Application of Supervisory Rules—Audit Category No. 1,” explicitly mandating that “an auditor should disclose the overall quantitative materiality of consolidated financial statements in special explanations of modified audit opinions, including materiality bases and percentages, calculation results (the amount) and the basis for selection.” This guideline took effect on 23 March 2021, following which auditors began to disclose the overall materiality of consolidated financial statements in special explanations of modified audit opinions. 1

Conclusions and implications

We take Chinese A-share listed companies issued with modified audit opinions during the period from 2020 to 2022 as a research sample to analyze materiality assessments in auditing practice, the relationship between materiality and audit quality and the impact of materiality disclosure on investor decision-making. We present four key results. First, the Big 10 audit firms are more likely to disclose audit materiality than peers. Second, the most common bases for materiality used by auditors are profit and income, the percentages applied to the different bases vary greatly and, even for the same base, the percentages vary to some extent. Third, the higher the materiality, the poorer is the quality of the audit. This negative correlation occurs mainly when the client firms engage in downward earnings management and among audit firms and auditors of lower competence than peers, indicating that materiality predicts the audit quality and has a certain level of informativeness. Fourth, disclosing audit materiality reduces investors’ perceptions of the reliability of financial reports.

The research in this paper assists in understanding how auditors establish materiality in auditing practice, thus opening the “black box” of the auditing process to an extent. In addition, our findings have important implications. First, for the auditing standard-setters, although the relevant rules emphasize that the bases and percentages contained in the questions and answers are examples, not regulations, auditors rely heavily on the examples in auditing standards, application guides and questions and answers in practice. Therefore, standard-setters should pay attention to this phenomenon and treat the examples provided with caution. Second, materiality itself is informative, and this enables investors, analysts and regulators to judge the quality of audits or audited financial statements based on materiality and make better investment decisions or enhance the efficiency of regulation.

Abstract

The digitalisation of processes is a current topic in accounting. New technologies can change activities which in turn may require different skills from accounting graduates. This paper aims to shed light on the changes that digitalisation brings about in various areas of accounting by assessing the types of activities (non-routine and routine) and corresponding competences in the context of progressing stages of digitalisation. In addition, it is analysed how different technologies are used in these activities and where their execution is placed within the supply chain. The systematic literature review shows a lack of expertise in the field of digitalisation that enables graduates and employees to successfully manage respective processes in the workplace. While routine activities are continuously being automated or digitalised, non-routine activities and the corresponding skills have a similarly increasing importance for employees in accounting as the acquisition of general digital competences.

Introduction

In the context of digitalisation, it is part of everyday life for customers to purchase products and services with the aid of an application online and in physical stores. The streams of products and finances within and between companies are also highly interconnected when they are based on digitalised processes (Appelfeller and Feldmann 2018). Digitalisation thus encompasses the entire supply chain of a product or service. Accounting is one area of the company that documents these processes with customers and other companies, enables these processes, supports them technically, and connects them with internal and external interfaces (Bleiber 2019; Klein and Küst 2020). In this context, companies nowadays face the challenge to make decisions on the introduction of new technologies and digitalised business processes into the area of accounting, among others (Appelfeller and Feldmann 2018). Digitalisation can address various stages, from substitution (e.g., self-check-out counters in retail shops) to business process innovation (e.g. automated storage and payment with RFID chips; see for these examples e.g. Litfin and Wolfram 2010). It is expected that not only costs and productivity are essential decision criteria for the introduction of technologies and digitalised business processes (Ashoka et al. 2019; Chen et al. 2012) but also the extent to which employees can master and employ technologies and possess the competence to fulfil new or evolving tasks (Aepli et al. 2017; Bonin et al. 2015; Cong et al. 2018; Egle and Keimer 2017; Seeber and Seifried 2019).

Results

Bibliographic information and main foci of publications
The majority of publications are in German (n = 51) and in English (n = 19). The dominance of German publications occurred due to the exclusion criteria. In our original set of 190 possibly relevant publications (Fig. 2), the distribution was fairly balanced with 98 publications in German and 92 in English. However, we excluded those publications which dealt with IT in a general manner (missing a direct link to accounting) and those which focused on other aspects of accounting but did not explicitly mention accounting activities. Most of these publications were in English, hence the large difference in the final data set. While most publications are either book chapters (n = 22) or journal articles (n = 21), whitepapers (n = 17), books (n = 5), and university publications (n = 5) constitute the minority. Looking at the year of publication, most sources were published between 2015 and 2020 (Fig. 5), fewer sources between 2000 and 2005. This rapid increase in publications indicates that digitalisation in accounting has gained popularity within the past five years and is now a leading topic in accounting publications.

Background: Evidence-based care for people with dementia is a priority for patients, carers and clinicians and a policy priority. There is evidence that people with dementia do not always receive such care. Audit and feedback, also known as clinical audit, is an extensively-used intervention to improve care. However, there is uncertainty about the best way to use it. Objectives: To investigate whether audit and feedback is effective for improving health professionals’ care of people with dementia. To investigate whether the content and delivery of audit and feedback affects its effectiveness in the context of health professionals’ care for people with dementia. Design: Systematic review Data sources: The Cochrane Central Register of Controlled Trials, Prospero, Medline (1946–December week 1 2016), PsycInfo (1967–January 2017), Cinahl (1982–January 2017), HMIC (1979–January 2017), Embase (1974–2017 week 1) databases and the Science Citation Index and Social Science Citation Index were searched combining terms for audit and feedback, health personnel, and dementia. Review methods: Following screening, the data were extracted using the Template for Intervention Description and Replication (TIDieR), and synthesised graphically using harvest plots and narratively. Results: Thirteen studies met the inclusion criteria. Published studies of audit and feedback in dementia rarely described more than one cycle. None of the included studies had a comparison group: 12 were before and after designs and one was an interrupted time series without a comparison group. The median absolute improvement was greater than in studies beyond dementia which have used stronger designs with fewer risks of bias. Included studies demonstrated large variation in the effectiveness of audit and feedback. Conclusions: Whilst methodological and reporting limitations in the included studies hinder the ability to draw strong conclusions on the effectiveness of audit and feedback in dementia care, the large interquartile range indicates further work is needed to understand the factors which affect the effectiveness of this much-used intervention.

Background

Evidence-based care for people with dementia is a priority for patients, carers and clinicians (Lind, 2014), and a policy priority (Department of Health, 2012; AHRQ Strategic Plan, 2014). Yet, people with dementia do not always receive evidence-based care. Data from the U.S. suggests gaps in the delivery of evidence-based care, for example, only 31% of people with dementia met the quality indicator of having been screened for depression during the initial evaluation (Arora et al., 2007). In England and Wales, the national audit of dementia found that whilst 97% of organisations had a process in place to undertake a mental state examination, this was done in only 50% of records audited (Royal College of Psychiatrists, 2013). An earlier audit of hospitals in England and Wales (Souza et al., 2014) found that only 26% of patients with dementia had a standardised assessment of functioning. The challenge of providing evidence-based care for people with dementia is not limited to hospitals, for example, they are often prescribed anti-psychotic drugs inappropriately in care homes (AllParty Parliamentary Group on Dementia, 2008; Kheun, 2013). Audit and feedback, also known as clinical, nursing or medical audit, is a practice change intervention to increase the receipt of evidence-based care (Souza et al., 2014). Audit and feedback is widely advocated as a way to increase the use of evidence and to provide data to assess assurance of care quality. It is a requirement of professional registration (e.g. General Medical Council, 2012), of regulatory arrangements (e.g. Care Quality Commission, 2010) and has an important role in nursing care (e.g. Christina et al., 2016). Audit and feedback involves comparing current care against an evidence-based standard, and giving feedback to staff on whether that current care meets those standards. Steps in the audit process have been described as planning, standard setting, measuring performance, providing feedback, implementing change and re-auditing (Benjamin, 2008).

Over the last three decades, rapid industrialization in China has generated an unprecedentedly high level of air pollution and associated health problems. Given that China accounts for one-fifth of the world population and suffers from severe air pollution, a comprehensive review of the indicators accounting for the health costs in relation to air pollution will benefit evidence-based and health-related environmental policy-making. This paper reviews the conventional static and the new dynamic approach adopted for air pollution-related health cost accounting in China and analyzes the difference between the two in estimating GDP loss. The advantages of adopting the dynamic approach for health cost accounting in China, with conditions guaranteeing its optimal performance are highlighted. Guidelines on how one can identify an appropriate approach for health cost accounting in China are put forward. Further, we outline and compare the globally-applicable and China-specific indicators adopted by different accounting methodologies, with their pros and cons being discussed. A comprehensive account of the available databases and methodologies for health cost accounting in China are outlined. Future directions to guide health cost accounting in China are provided. Our work provides valuable insights into future health cost accounting research in China. Our study has strengthen the view that the dynamic approach is comparatively more preferred than the static approach for health cost accounting in China, if more data is available to train the dynamic models and improve the robustness of the parameters employed. In addition, future dynamic model should address the socio-economic impacts, including benefits or losses of air pollution polices, to provide a more robust policy picture. Our work has laid the key principles and guidelines for selecting proper econometric approaches and parameters. We have also identified a proper estimation method for the Value of Life in China, and proposed the integration of engineering approaches, such as the use of deep learning and big data analysis for health cost accounting at the fine-grained level (city-district or sub-regional level). Our work has also identified the gap for more accurate health cost accounting at the fine-grained level in China, which will subsequently affect the quality of healthrelated air pollution policy decision-making at such levels, and the health-related quality of life of the citizens in China.

Introduction

Over the last three decades, rapid industrialization in China has caused significant air pollution and health challenges (Diamond, 2005; Lagorio, 2010; Lim, 2007). The mean annual PM2.5 concentration in China’s major cities reported to be 43 μg/m3 , had exceeded 4 folds based on the threshold of 10 μg/m3 annual mean concentration set by the World Health Organization in 2017 (Chan and Danzon, 2005; MEEPRC, 2017). Serious air pollution has created severe health risks (Dockery and Pope, 1994; Dockery et al., 1992, 1989), raising increasing concerns in China (Wang, 2016). People’s quality of life has deteriorated continuously with increasing rates of morbidity and mortality. Pollution has also affected tourism negatively, and triggered people to move out of the polluted cities in China (Liang and Zhao, 2015). Against such background, quantification of air pollution-related health costs is needed for reviewing how much air pollution in China has costed the health of its own citizens, and how serious the problem is, before any sound and justifiable health-related environmental policy measures can be designed. Thompson et al. has conducted a quantitative study and suggested that the costs of United State’s carbon policies could be offset by 26% to 1050% due to air pollution control policies in the states that improve air quality and reduce health costs, indicating those policies are worthy of implementation (Thompson et al., 2014). Another study in China has shown that various polluted provinces in China should closely cooperate in order to minimize the regional health costs due to PM2.5 (Wu et al., 2017). Given that China hosts one-fifth of the world’s population and is a key contributor to global air pollution (Kaiman, 2013), The beneficiaries of developing reliable and precise health cost accounting methodologies for China’s air pollution will not be restricted to Chinese policy-makers, but also researchers who are interested in air pollution-related health policy studies globally (OECD, 2014).