Materiality

The magnitude of an omission or misstatement of accounting information that in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement

Characteristics

 Major consideration in determining the appropriate audit report

 Referenced in auditor’s responsibility section of the audit report

determine whether financial statements are materially misstated

Bring it to the client attention for correction

Absent of correction: issue qualified or adverse

Steps in Applying

Planning

Evaluation

Set materiality for the financial statements as a whole: PJFM
maximum amount that statements could be misstated and still not affect users’ decisions

Factors

 Materiality is a relative rather than an absolute concept.

 Benchmarks are needed for evaluating materiality.

 Qualitative factors also affect materiality.
SEC #108 require Auditor to consider qualitative and quantitative factors to assess materiality

there is no Guidelines for applying materiality, professional judgement is used

Materiality performance

Evidence is accumulated by segments rather than for the financial statements as a whole

Based on Balance sheet items (considering the effect on IS)

Estimate the combined misstatement

Compare combined estimate with PJFM (or revised)

Estimate total misstatement in segment

Known and Likely Misstatements

 Judgmental differences

 Projections of misstatements from audit samples

Projection