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Anything the inclusion or exclusion of which can alter the decision of the reader, making decision on the basis of the financial statement. This may be material in terms of quantity or quality.
The concept of materiality recognises that some matters,either individually or in the aggregate, are relatively important for true and fair presentation of the financial information in conformity with recognised accounting policies and practices. There are no sets of rules or prescriptions that may be applied consistently to determine materiality in all circumstances. Materiality is a relative terms. What may be material in one circumstance may not be material in another. The assessment of what is material is a matter of professional judgement and experience of the auditor.
Materiality = quantity and quality
Both the amount (quantity) and nature (quality) of misstatements are relevant to deciding what is material.
How does materiality apply in an audit?
The objective of a financial statement audit is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. This is a separate responsibility and a separate decision from that made by the entity itself when preparing the financial statements.
In auditing, materiality means not just a quantified amount, but the effect that amount will have in various contexts.
During the audit planning process the auditor decides what the level of materiality will be, taking into account the entirety of the financial statements to be audited. Materiality relates to both the content of the financial statements and the level and type of testing to be done. The decision is based on judgements about the size, nature and particular circumstances of misstatements (or omissions) that could influence users of the financial reports. In addition, the decision is influenced by legislative and regulatory requirements and public expectations.
If, during the audit, the auditor acquires information that would have caused it to determine a different materiality level, it will revise the materiality level accordingly.
Material items in Audit are significant items or classes of transactions which can have wider risks and control has to be established .Revenue and cost of sales,receivable,payable all form part of material amounts for most of industry specific audits
It is the amount which is big enough to the whole financial statement.
