Concept of Materiality is widely used in the field of ‘Accountancy’ and ‘Auditing’. Information is material if its omission or misstatement can influence the economic decisions of the users taken on its basis. Furthermore, materiality relates to both the ‘Size’ and ‘Nature’ of an item.
Concept of Materiality is used by “Accountant” and “Auditors” to perform their respective responsibilities in effective and efficient manner. Preparation of financial statements require use of significant estimates by management such as; accruals at closing dates, bad debt provision and disclosures of significant issues such as law suits by or against the company. Management ensures that size of estimates is materially accurate and information of material nature is disclosed adequately in the financial statements such as related party transactions and events.
Auditing firms conduct audit as efficiently as possible without compromising its effectiveness. Audit firms also need to minimize its cost of providing services to its client to maximize its own profits. Setting a materiality threshold is one way to achieve this objective. Materiality levels for the amount and nature of transactions are calculated/decided during planning an audit engagement. Most of the audit firms use a certain basis for determining quantitative threshold. Common practice is to take a certain percentage of ‘gross sales’, ‘net profit’, or ‘profit after tax’. Legal transaction and issues are considered material due to their nature. Amount of such legal transaction and issues maybe small but its future financial impact on the operation of an entity may be critical to the users of financial information.
Auditing firms conduct audit as efficiently as possible without compromising its effectiveness. Audit firms also need to minimize its cost of providing services to its client to maximize its own profits. Setting a materiality threshold is one way to achieve this objective. Materiality levels for the amount and nature of transactions are calculated/decided during planning an audit engagement. Most of the audit firms use a certain basis for determining quantitative threshold. Common practice is to take a certain percentage of ‘gross sales’, ‘net profit’, or ‘profit after tax’. Legal transaction and issues are considered material due to their nature. Amount of such legal transaction and issues maybe small but its future financial impact on the operation of an entity may be critical to the users of financial information.
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