Question

Please discuss materiality. What is materiality and why is it important for auditing? What are the qualitative and quantitative factors that determine materiality?

Answer 1

Concept of Materiality- This concept tells the importance of any item in the accounting and auditing, whether it should be taken into consideration or not. Sometimes an item is so small that if it is not included, nobody will be misled and no one will alter his/her decision because of not taking the item into consideration. This is called Immateriality. Materiality is the impact of inclusion or exclusion of an item on financial statements users.

Importance for Auditing- Materiality is very important for auditing. While auditing, it has to be seen whether the amount should be taken into consideration or not. This decision is taken on the basis of size, nature and its impact on financial statements and its users. This concept shows the correct picture of auditing and makes the auditing more accurate.

Qualitative and Quantitative factors that determine materiality- Materiality involves both; Qualitative and Quantitative factors. If any item is inclusion or exclusion, both the amount as well as nature are seen and analyzed whether it is relevant or not. If an amount is so small (for e.g. $10) as it can be ignored then it will be a qunatified materiality. If the item is not very significant as it can alter somebody's decision, it will be called Qualified materiality.