Question
In: Accounting
What factors and measures should be considered in assigning the materiality of a misstatement in the...
What factors and measures should be considered in assigning the materiality of a misstatement in the presentation of a financial statement?
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Expert Solution
Materiality refers to the value assigned to an item in the financial statement. For reporting and auditing puposes, a materiality level is set by the organization and the auditors. Items falling below the materiality threshold are considered to not misreperesent the financial statements so as to misguide the intended users. The factors determining the materiality of a misstatement are:
Nature of the item- The exact nature of the misstaement is important. For example, if there is embezzlement or fraud even of a small amount, it shall be considered material.
Size of the item-The amount of the misstatement as compared to the turnover of profit of the company is considered. For example, an item constituting 0.01% of the turnover might be considered immaterial.
The various measures of assessing materiality are as follows:
-As a % of gross revenue
-As a % of total assets
-As a % of gross profit
-As a % of shareholder equity
-As a % of net profit
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