Lessons · Accounting · materiality: how much wrong would matter
Materiality: how much wrong would change a decision
Materiality is the size of misstatement that would change what a reader of the accounts decides. It is set at planning, from a benchmark the firm chooses and a percentage its methodology sets, and it is a matter of judgement rather than a number in a rule book.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
Without it there is no way to decide when to stop, and no way to decide whether something found matters. Every audit is finite, and materiality is the line that makes it finite in a defensible way rather than an arbitrary one.
How to think about it
Take the benchmark that best represents what readers care about for this entity. Apply the firm's percentage. The result is the threshold everything else is measured against.
Worked example
Choose the benchmark: profit, revenue, or total assetsWhichever readers of THIS company actually use.
Apply the percentage the firm's methodology setsA policy, not a rule of law, and it varies.
The result is materiality for the statements as a wholeThe line for the whole engagement.
A loss-making company may need a different benchmarkA percentage of a profit near zero gives a materiality near zero.
Your turn
Name what a misstatement must be capable of changing to be material.
A misstatement is material if it could change a reader's
Solve one, graded on the server
The trap
Quoting a percentage as though it were a rule. The common benchmarks are conventions set by firm methodology, they move with the entity, and stating one as a requirement is the fastest way to sound confident and be wrong.