A Structural Model of Auditors’ Professional Judgment and Financial Reporting Quality: Evi-dence from Materiality, Strategic Risk, and Value Creation

Abstract

Amin El Sayed Ahmed Lotfy and Duaa Sadek

This study develops and empirically tests a structural model that positions auditors’ professional judgment as a primary driver of financial reporting quality, rather than as a residual response to audit risk and compliance requirements. Using data from listed companies and employing Structural Equation Modeling (SEM), the study provides evidence on how professional judg- ment operates within governance-intensive reporting environments shaped by materiality, strategic risk, and value creation.

The findings indicate that auditors’ professional judgment has a statistically and economically significant effect on financial reporting quality. Moreover, this effect is systematically conditioned by qualitative materiality considerations, exposure to stra- tegic risk, and the prominence of value-creation narratives, such that judgment becomes most consequential when these gover- nance dimensions interact.

By conceptualizing professional judgment as a structural governance mechanism, the study extends prior auditing research that has largely treated judgment as an outcome rather than a causal force. The results offer implications for auditing theory, audit methodology, and regulatory policy by highlighting the central role of judgment-based assurance in enhancing reporting credibility in complex and forward-looking reporting environments.

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