What Is Materiality? Essay

1136 words - 5 pages

According to the auditing standard, “Materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce, to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole” (Canadian Institue of Chartered Accountants 2012a). We might also consider out textbooks definition “The magnitude of an omission or misstatement, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatements (Arens, et ...view middle of the document...

In addition to noting that materiality is essentially a matter of professional judgment, this group suggested that: 'Quantitative guidelines within broad parameters are usually used in practice and we believe they could be developed by the authoritative bodies in the three nations'. Also, during 1974 a Statement of Accounting Standards on Materiality in Financial Statements was issued jointly by the two authoritative accounting bodies in Australia. A similar standard was issued in New Zealand in 1977 (Selley 2010). These statements help users determine materiality as well as the rules guiding it.
In 1975, the March publication of the Financial Accounting Standards Board Discussion Memorandum was, An Analysis of Issues Related to Criteria for Determining Materiality. This is perhaps the most important event to date in the question of materiality from both an accounting and an auditing point of view. Following this an enormous amount of work and research surrounding materiality was completed (Selley 2010).
Another significant event, would be the probable publication during 1984 of a research study by the CICA entitled Materiality—The Concept and its Application to Auditing. This study is authored by Donald A. Leslie, FCA, who has written several papers on this subject and who is heavily involved in the subject of statistical sampling. It is by far the most comprehensive study to date and is prepared from the auditor's point of view (Selley 2010).
The aforementioned history is only a peek into the vast changes that have occurred throughout history. It is also important and should be remembered that throughout the period from at least the 1950s, a considerable amount of empirical research was carried out, a number of legal decisions were made, and a few specific guidelines were set out for specific situations by the Securities Exchange Commission (SEC) and by the American Institute of Chartered Professional Accountants. These events show us how materiality has evolved since the early 1900’s. We can see that materiality with respect to accounting and auditing is something that will continue to change throughout time as standard setters are always seeking to improve upon rules and guidelines.

Works Cited

Accounting-Simplified.com. 2013 "Materiality." Accounting-Simplified.com. http://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/accounting-materiality.html (accessed 02 28, 2014).
Arens, Alvin A, Randal J Elder, Mark S. Beasley, and Ingrid B. Splettstoesser. 2012. Auditing: The Art And Science of Assurance Engagements. Vol. 12. New Jersey: Pearson Education Inc.
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