Question

One of the clients of MMM Chartered Accountants operates a restaurant. From January of the current year, the business has consistently paid its suppliers late, well in excess of the suppliers' normal credit terms. This has resulted in some suppliers requesting cash on delivery from the business. The auditor has reviewed the correspondence between the business and its bank and finds that the business has been experiencing cash flow problems for two years. Required: (a) Explain why determination of materiality is a matter of auditor judgment. Refer to both qualitative and quantitative materiality assessments . (b) Explain whether (and, if so, how) the information provided impacts on the auditor's assessment of preliminary materiality

Answer 1

Materiality concept considers a situation where the financial information of a company are said to be material if that information has the potential to alter or change the views of the users of that financial statement.

The auditor's perception of materiality will depend upon his professional judgment on what information is material and how they influence the users of that financial statement.

The auditor's duty and responsibility is to ensure that no material information is misstated in the financial statements and if he did find a material misstatement then he must bring it to the attention of his or her client and advice to make the necessary changes and can also give his expert opinion on the same.

Materiality is not fixed but rather relative to the size, type and circumstances of different companies. Thus, an auditor must have a thorough knowledge of the application of materiality concept.