MATERIALITY IN AUDITING :
Materiality is a concept or convention within auditing and accounting relating to the importance/significance of
an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor
to express an opinion whether the financial statements are prepared, in all material respects, in conformity with
an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP). The
assessment of what is material is a matter of professional judgment.
Materiality can be defined as the magnitude of an omission or misstatement of accounting information that, 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 misstatement.
SA 320 “Materiality in Planning and Performing an Audit”, establishes standards on the concept of materiality and the relationship with audit risk while conducting an audit. Hence, the auditor requires more reliable evidence in support of material items. SA 320 defines material items as relatively important and relevant items, i.e., items the knowledge of which would influence the decision of the user of financial statements.
The auditor has to ensure that material items are properly and distinctly disclosed in the financial statements.
The concept of materiality is fundamental to the process of accounting. It covers all the stages from recording to classification and presentation. It is very important for the auditor who has constantly to judge whether a particular item is material or not. There is an inverse relationship between materiality and the degree of audit risk. The higher the materiality level, the lower the audit risk and vice versa. For example, the risk that a particular account balance or class of transactions could be misstated by an extremely large amount might be very low but the risk that it could be misstated by an extremely small amount might be very high.