Materiality is an essential consideration in determining the appropriate type of report for a given set of circumstances.
The common definition of materiality as it applies to accounting and therefore to audit reporting are as follows –
“A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable use of the statements.”
Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.
Materiality is defined by the Financial Accounting Standards Board (FASB) as –
The magnitude of an omission or misstatement of accounting information that, in the light of 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.
In applying this definition, the auditor is required to consider both –
(a) The circumstances pertaining to the entity and
(b) The information needs of those who will rely on the audited financial statements.
Materiality is a concept or convention within auditing and accounting relating to the significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP) The assessment of what is a material of professional judgment.