Question

hi I have a question in regards to auditing. I have received a question that is the following: The sales balance is misstated by $ 1 million. Please justify with supporting numbers to substantiate that the misstatement is material or Immaterial?

Answer 1

We usually say in accounting that  materiality refers to the relative size of an amount. Large amounts are material, while relatively small amounts are immaterial. It also depends on the type or size of the business, For instance, a $25,000 amount will likely be immaterial for a large corporation with a net income of $1,000,000. The same $25,000 amount will be material for a small corporation with a net income of $50,000, though.

Frst we have to identify if the 1 million is over or under the real value of sales. Anyways this misstatement is material because it can surely impact the economic decisions of the financial reports users, (owners, investors, lenders, etc)

If it is an extra million (over the real value), the net income will be also affected; it will have a higher amount. Therefore the business might have to pay more taxes, might consider posibilities of expansion (buy assets) or give dividends. All that based on an UNREAL situation.

If it´s a million less (under the real value), the net income will be also affected; it will have a lower amount or even a net loss. consequently, the business might look for sources of funding or use their retained earnings with no necessity. it might also be seen as a way of avoiding taxes by the IRS and cause bigger issues.

In both cases, corrections must be advised by the auditor in charge of the audit.

Hope this helps you!