It is the responsibility of an independent auditor to plan and perform an audit of financial statements that will provide reasonable assurance of detecting errors and irregularities that are material in nature. According to the Financial Accounting Standards Board, the essence of the concept of materiality is: “The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” Materiality is a term that is hard to quantify, and must be determined for each individual situation. Public accounting firms have established informal quantitative and qualitative measures in an attempt to establish materiality thresholds. These measures have been affected and enhanced by statements of the Securities and Exchange Commission and other regulatory agencies and professional organizations.In setting the preliminary judgment about materiality, auditors establish the maximum amount by which they believe the statements could be misstated and still not affect the decisions of reasonable users. An amount is considered material when it is one dollar more than the amount required for a user of financial statements to change their decision. Two broad types of materiality have been recognized: quantitative and qualitative. Quantitative materiality is economic in nature and exclusively depends on the effect of a fact on the company’s financial performance. Typically, public accounting firms have established quantitative materiality thresholds, and have used specific mathematical procedures in this process. Once the effect of a fact exceeds a certain percentage or amount of the item serving as the base measurement (ie. net income, stock price, or total assets), the fact is disclosed ...
