Materiality Concept in Auditing
Materiality concept in auditing referred to the concept that the information is important or significant enough to affect the decisions making of users of financial statements if such information is removed or change how it is presented. It helps auditors to focus their attention on the areas where the material errors or omission may occur.
In auditing, the materiality concept usually applies when auditors evaluate whether the client’s financial statements contain material misstatement or not. In this case, financial statements do not give a true and fair view if they contain material misstatement.
In accounting, accountants usually use the materiality concept as a basis for preparing financial statements. For example, accountants usually come across a lot of circumstances where they need to make the best estimate.
Hence, they need to apply the materiality concept so that they can make sure that there are no errors or omissions that would materially affect the decision making of the users of financial statements.
Qualitative and Quantitative Factors of Materiality Concept
When assessing the materiality, auditors usually need to consider what type of information, they are dealing with; and how much the amount is involved. For the materiality concept in auditing, these are usually referred to as qualitative and quantitative factors of the materiality concept.
Quantitative consideration is simply about the relative size of the items in the financial statements. On the other hand, qualitative factors usually include the nature of information, the circumstance and possible cumulative effects of error or omission of such information.
For example, the nature of the error that comes from the fraud, thief or bribery is usually considered material even the relative amount involved is small. And the same theory applies to those of the circumstance involving a lot of uncertainties of future events and those of relatively small errors that can exceed overall materiality when they are accumulated.
Materiality Concept of Different Users
Different users of information may have different preferences when applying the materiality concept in auditing. Hence, it is very important for accountants or auditors to define who is the primary user of financial information.
For example, investors or lenders usually want the information that can help them make the decision in funding the company. These would help them to decide whether to invest more in the company.
On the other hand, some shareholders may interest in cooperate governance information e.g. director remuneration. In this case, when applying the materiality concept, director remuneration may be immaterial for the company as a whole; but it tends to be material to them as shareholders. Hence, they may use this information to decide on voting e.g. to appoint or to remove the director.
Materiality concept in auditing involves a lot of professional judgment. Hence, it is important to understand the types of information and amount involved as well as who are the primary users of particular information when exercising judgment to determine materiality.