Materiality thresholds in Maltese external public sector auditing

Abstract

PURPOSE: Research on materiality within public sector audits is limited. The study aims to ascertain the current procedures employed to establish materiality and materiality thresholds within Maltese public sector audits; to evaluate government auditors' reactions towards the prospect of disclosing materiality thresholds in public sector audits; and to evaluate the relevance of materiality standards with respect to public sector audits. DESIGN: A group interview was carried out with personnel from the Financial and Compliance section of the National Audit Office and semi-structured interviews were conducted with Local Government Auditors. FINDINGS: Materiality thresholds are usually lower in comparison to those in private sector audits, in order to strengthen accountability and safeguard public money. In fact they are set at zero when the NAO audits the Government's annual Financial Report. Paramount importance is given to the qualitative aspect of materiality even due to legal requirements. It is envisaged that disclosure of materiality thresholds will be beneficial from a transparency viewpoint, but may raise some issues. CONCLUSIONS: Various benchmarks are used to establish materiality and this portrays that materiality treatment is inconsistent among government auditors. Government auditors are inclined to focus more on the qualitative factors. The idea of disclosing materiality thresholds is regarded as having the same effect of a double-edged knife, it would strengthen transparency but it will also increase criticism. IMPLICATIONS: In order for disclosure of materiality to be successful in public sector audits, users of public sector financial statements need to understand the concept of materiality. The need for users to have proper audit knowledge was als and Talha (2003), it is impossible to have rules which would take into consideration every situation.