Materiality
Materiality is the magnitude of an omission or misstatement that, individually or in aggregate, could reasonably influence the economic decisions of financial statement users.
Explanation
Auditors establish materiality at the overall financial statement level during planning and may also set performance materiality at a lower amount to reduce the risk that uncorrected and undetected misstatements exceed overall materiality. Materiality is a matter of professional judgment, often based on a percentage of a benchmark such as net income, total revenue, or total assets. It may be revised as the audit progresses.
Key Points
- •Set at the financial statement level based on professional judgment
- •Performance materiality is set lower to provide a margin for undetected misstatements
- •Common benchmarks include net income, revenue, and total assets
Exam Tip
Know that materiality is based on the needs of financial statement users, not management — and that it can be revised during the audit.
Frequently Asked Questions
Related Topics
Audit Planning
Audit planning is the process of developing an overall strategy and detailed approach for the expected nature, timing, and extent of an audit engagement.
Audit Risk Model
The audit risk model expresses audit risk as a function of inherent risk, control risk, and detection risk: AR = IR × CR × DR.
Test your knowledge
Practice scenario-based questions on this topic with detailed explanations.