Materiality

Question 1

Define ‘material’…

Answer 1

Information is material if its omission or misstatement could be reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The materiality level set by the auditor will always be a matter of judgement and will depend on the level of audit risk.

Question 2

How do you calculate materiality?

Answer 2

Revenue = 1/2 to 1 %
Total assets = 1 to 2
Profit before tax = 5 to 10

Question 3

What is meant by performance materiality?

Answer 3

Performance materiality is the amount or amounts set by the auditor at less than materiality for the financial statements are a whole to reduce to an appropriately low level that probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

The amount or amounts set by the auditor at less than materiality level or levels for a particular classes of transactions, account balances or disclosures.

Determining performance materiality often involves the auditor’s professional judgement. It is affected by their understanding of the entity and the results of risk assessment procedures. It can be both quantitative or qualitative.