Question

Describe the mechanics used to calculate overall materiality and tolerable misstatement. Specifically, what quantitative and qualitative aspects are considered?

Answer 1

Materiality in Accounting means the amount which has some value and when it is disclosed in financial statements, the stakeholders decision may vary, which means disclosing it may have impact on decision making, then it is called materiality.

Tolerable misstatement means if any transaction or line in financial statements are omitted and it doesn't have huge affect on financial statements then those things are considered as tolerable misstatement.

Qualitative mechanics:

Here these mechanics changes to every industry, so each company in different industries have different way of doing things. Because for in industries and hotel industry we have lot of cost of materials consumed, so here we need to check thoroughly purchases, opening and closing stock. But in IT industry there will be no cost of materials consumed, it will have software licences and assets so here the approach is different. Also change in CEO, officers in high cadre will comes under materiality. So, depending on industry the area we need to concentrate changes.

Quantitative mechanics:

The most important way to find the materiality, here calculation is used by way percentage, like %of particular type of expenses or incomes in overall expenses or incomes, then we can keep our eye on high percentage accounts. Also the drastic changes in ledger balances from previous year to this year also come under materiality, if any new contracts, new projects,etc are made comes under Quantitative.