Question

What is the relevance of materiality during an audit

Answer 1

ANSWER

Materiality is defined as the magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Materiality is important because if financial statements are materially misstated, users' decisions may be affected, and thereby cause financial loss to them. It is difficult to apply because there are often many different users of the financial statements. The auditor must therefore make an assessment of the likely users and the decisions they will make. Materiality is also difficult to apply because it is a relative concept. The professional auditing standards offer little specific guidance regarding the application of materiality. The auditor must, therefore, exercise considerable professional judgment in the application of materiality.

The concept of materiality is important to the audit as it guides the auditor on important decisions related to the collection of evidence. The auditor usually needs more evidence about items that are more material, and less evidence is usually needed for items that are less material.

Materiality guides the auditor in the evaluation of audit findings. The auditor will usually discuss immaterial errors with a client, but the auditor may not require that the financial statements be changed for immaterial misstatements. If projected errors are material the client should either modify the financial statements or the auditor will have to issue a qualified opinion on the financial statements.