Material means something significant, more important and relevant.
Concept of Materiality is fundamental to both accounting and auditing.
Accounting standard 1 describes materiality as “those items the knowledge of which would influence the decision of the users of the financial statements“.
Golden rule of Materiality :
What is material in one circumstance may not be material in another circumstance.
It is a relative concept hence depends on various factors and cannot be standardized or cannot be uniform in all circumstances.
What is material to the management may not be material to the auditor.
A Fire in warehouse destroys goods worth Rs.500 along with the inventory records. It is material to auditor as he may not be able to obtain sufficient and appropriate audit evidence whereas the loss being small would be immaterial to the management.
Auditing and Materiality :
The concept of materiality is applied by the auditor both in planning and performing the audit.
SA 320 deals with Materiality in planning and performing the audit.
Auditor’s responsibility regarding Materiality : Evaluating the effect of identified misstatements on the audit & of uncorrected misstatements, if any on the financial statements and in forming an opinion in the auditor’s report.
The assessment of what is material is a matter of auditors professional judgment.
Factors that influence Materiality :
- Size of an item.
- Nature of an item
- Circumstances in which it becomes material.
- Requirements of laws and regulations.
The assessment of materiality should be made both at the assertion level and at the overall financial statement level.
At the overall financial statement level the auditor is concerned about aggregate materiality which is relevant to forming an opinion on the financial statements whereas at the assertion level he is concerned about the individual materiality which is relevant to evaluating whether a misstatement is material.
Factors influencing auditor’s judgment regarding materiality:
- In respect of an item in profit and loss account , materiality should be judged based on the effect of such item on the net profit or loss or turnover for the period.
- In respect of an item in balance sheet, materiality should be judged based on the effect of such item on the group or head under which it is classified.
- Those items which are required to be disclose separately in accordance with legal or regulatory requirements are considered to be material.
- If an item in financial statement can change a profit into loss or vice versa such an item is considered material.
- Even a small balance or nil balance may be considered material if such balance is considered to be unusual or exceptional.
- If an item in financial statement can increase or decrease the margin of solvency or insolvency, it is considered material.
- Unusual or abnormal items of non recurring nature shall be considered material.
Those items of individual materiality should not be set off against each other and the effect of such items determined independently should be disclosed separately.
Thus, materiality is not uniform in all circumstances and it keeps changing accordingly.
At CAKART www.cakart.in you will get everything that you need to be successful in your CA CS CMA exam – India’s best faculty video classes (online or in pen drive) most popular books of best authors (ebooks hard copies) best scanners and all exam related information and notifications.Visit www.cakart.in and chat with our counsellors any time. We are happy to help you make successful in your exams.
Click Here to download FREE CA CS CMA Text Books.