Meaning of the Term Materiality as Used in Accounting and Auditing

Meaning of the Term Materiality as Used in Accounting and Auditing

Meaningof the Term Materiality as Used in Accounting and Auditing


Meaningof the Term Materiality as Used in Accounting and Auditing

Materialityis a term that is used in auditing and accounting because it is usedto influence the decisions that relates to economic states of theusers as taken from the financial statements. Therefore, materialityis used to show the significance of the transactions, errorsnoticeable, and balances in the financial statements. Consequently,the auditors and the accountants use materiality to outline thethreshold or basically the cutoff point where beyond the definedpoint the financial information is deemed to be relevant the usecan, therefore, make decision maker based on the cutoff point. As aresult, according to Epstein, Nach, &amp Bragg (2009), theinformation that is held in the financial statement should becompleted fully in all the materials with respect to the demand ofthe user this is aimed at ensuring that the financial information iscorrect, true, and fair as required by the affairs of the entity. Forthis reason materiality is taken to be relevant to the particularsand size of the individuals or the companies. For example, whenhanding the financial materiality based on the size, a customer mayowe a company 1000 dollars and have a net asset worth more than 10million dollars making his worth immaterial to the overall financialstatement of the company involved. On the other hand, if the totalamount that is owned by the defaulter is say 2 million dollars them,we can say that the information is material to the company’sfinancial statement. However, if this statement is given to thecompany by an auditor or an accountant the company will be subjectedto making business decision that is not correct.

Onthe other hand, auditors or the accountant can determine thefinancial materiality based on the nature of the financial statement.For example, when an auditor note that the company being audited isplanning to curtail all of its operations in a specific geographicarea that is traditionally a major source of income and tax payable,then the auditor is supposed to disclose the information in thefinancial statements (Keune &amp Johnstone, 2012) this is based onthe nature of materials that is aimed at understanding the scope ofthe entity, its operations, and the future. Additionally, theauditors and accountants use the term materiality to link theaccounting principles and concepts such as financial reliability,relevance, and completeness. In relevance, materiality is used toinfluence the economic decisions based on the users making itrelevant to the needs of the business’ financial statements.Secondly, materiality is used to determine the reliability of thefinancial statements. This is because misstatement or informationomission especially when handling sensitive or important financialinformation can hinder the user from making informed decisions basedon the financial statements. This affect the reliability of thefinancial information provided. On the other hand, auditors andaccountants use financial information materiality to determine thecompleteness of the information provided to the user. This is becausethe information that is contained in the financial statement shouldbe fully complete in all material. This is because the auditors orthe accountants are required to provide fair and true overview andaffairs that concerns the company (Stewart &amp Kinney, 2012).

Onthe other hand, there is a direct relationship between materialityand the phrase ‘obtain the reasonable assurance’ that is used inthe accountants or auditors’ reports. Firstly, the term materialityis used to underline the various applications of the auditingstandards that are used internationally. Consequently, materiality isa term that has a pervasive effect on the ‘reasonable financialassurance’ after the audit is complete. As a result, when a companyor a business is carrying out an audit, the auditor is supposed toconsider the materiality when planning the audit or evaluating thebusiness’s financial presentation as indicated in the financialstatements. This should be based on the identified financialreporting (Heitzman, Wasley, &amp Zimmerman, 2010).

However,according to Iovino &amp Oppermann (2012), additionally, whendetermining the reasonable financial assurance, materiality id themain factor that is used examining materiality requires professionaljudgment. This is because reasonable assurance as determined usingmateriality is achieved where the auditor evaluates not only theamount and nature of the items that is relative to the requiredfinancial statement but also examine the needs of the users’financial statement.

Inconclusion, when determining the reasonable assurance, materialitymust be considered before any detailed auditing is prepared by theauditor. In addition, initial planning is very crucial and theauditor is supposed to determine all the factors that influence‘reasonable assurance’ and materiality. This is because there ismateriality judgment that is used to evaluate and determine the truthin the auditor’s report after the audit process is completed (Keune&amp Johnstone, 2012).Lastly, it is evident that materiality is essential for an auditefficiency. As a result, business auditor is not supposed to takemuch of their time examining financial errors or balances when thecompany’s chances or making errors are minimal. However, whencarrying out an audit in a firm it is paramount to audit everythingto achieve reasonable assurance.


Epstein,B. J., Nach, R., &amp Bragg, S. M. (2009). WileyGAAP 2010: Interpretation and Application of Generally AcceptedAccounting Principles.John Wiley &amp Sons.

Heitzman,S., Wasley, C., &amp Zimmerman, J. (2010). The joint effects ofmateriality thresholds and voluntary disclosure incentives on firms’disclosure decisions. Journalof accounting and economics,49(1),109-132.

Iovino,S., &amp Oppermann, S. (2012). Material ecocriticism: Materiality,agency, and models of narrativity.

Keune,M. B., &amp Johnstone, K. M. (2012). Materiality judgments and theresolution of detected misstatements: The role of managers, auditors,and audit committees. TheAccounting Review,87(5),1641-1677.

Stewart,T. R., &amp Kinney Jr, W. R. (2012). Group audits, group-levelcontrols, and component materiality: How much auditing is enough?.TheAccounting Review,88(2),707-737.