Question

what is a one cent error worth and why is materiality unimportant in fraud examination

Answer 1

Solution:

If you are reconciling bank statement or matching a trai balance, if there is a difference of one cent then even it can worth a lot. This one cent error may result in to error of crores individually.

Lets take an example, you have not recorded sale into customer ledger for $1,000,000. However sale is recorded in sales ledger. Further you have not recorded purchase of $999,999 in purchase register though same is recorded in creditor ledger. In this scenario, your trial balance will show a difference of $1 only, however it will not refelect amount recoverable from customer $1,000,000 is not recorded, that may result in to loss to the organization. Therefore error of one cent should be taken seriously, because it can result in to loss of crores to the organziation on individual item basis.

Materiality is unimportant in fraud examination, because in fraud examination you are examining compliance of company code of conduct, ethics by employee and outside parties. Even if fraud is for small amount, but integrity of person involving in fraud will be at stake. If he can do a fraud of small amount, he can do fraud of big amount in future, if organization will not take it seriously because of small amount involved. Therefore materaility is unimportant in fraud examination.